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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___ to ___.
Commission file number 000-21463
Murdock Communications Corporation
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(Exact name of registrant as specified in its charter)
Iowa 42-1339746
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
701 Tama Street, Marion, Iowa 52302
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319-447-4239
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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(Title of class)
Redeemable Common Stock Purchase Warrants
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes No X
--- ---
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of June 28, 2002 (the last business day of the registrant's most
recently completed second quarter) was $669,389. Shares of common stock held by
any executive officer or director of the registrant and any person who
beneficially owns 10% or more of the outstanding common stock have been excluded
from this computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
On March 1, 2003, there were outstanding 12,304,967 shares of the
registrant's no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
ITEM 1. BUSINESS
GENERAL
Murdock Communications Corporation ("MCC" or the "Company") previously operated
as a holding company with the Company's principal assets as of December 31, 2000
being the Priority International Communications, Inc. ("PIC") business segment
and its investment in Actel Integrated Communications, Inc. ("Actel"). PIC was
largely a reseller of call processing services. Actel, based in Mobile,
Alabama, was a facilities-based competitive local exchange carrier of advanced
voice and data communications services to small and medium sized enterprises.
Actel offered advanced end-user services in the Southeastern United States.
Actel filed for bankruptcy under Chapter 11 on April 11, 2001. As a result, the
Company recorded an impairment charge of $1.6 million in 2000, due to the
uncertainty of ultimate recovery of its investment in Actel. On September 14,
2001, Actel's case was converted to a case under Chapter 7.
Effective July 31, 2001, the Company sold all the shares of PIC to Dartwood, LLC
for a total purchase price of $196,000, comprised of $100,000 cash and a
non-interest bearing promissory note of $96,000 payable in 24 monthly
installments of $4,000. The Company assigned the cash payment of $100,000 and
the promissory note to MCC Investment Company, LLC ("MCCIC"), a company owned by
Berthel Fisher & Company, Inc. ("Berthel") and another significant shareholder
of the Company to repay $196,000 of outstanding debt. Wayne Wright, a director,
executive officer and shareholder of the Company, is the father of the owner of
Dartwood, LLC. The disposition was recorded in the third quarter of 2001 and
resulted in a gain of approximately $1.3 million for the Company.
The Company has no operating activities and no reportable segments. The
Company's current strategic direction is to continue to negotiate with its
creditors to restructure indebtedness and to explore potential merger
transactions. For information regarding the Company's proposed merger
transaction with Polar Molecular Corporation ("Polar"), see "Recent Developments
- - Merger Agreement with Polar." If the Company is unable to restructure its past
due debt, or if the holders of the Company's past due debt seek to enforce their
rights, the Company would not be able to complete the proposed merger with Polar
or to continue operating as a going concern. See "- Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
MCC was incorporated as an Iowa corporation in 1989.
3
RECENT DEVELOPMENTS
MCC'S PAST DUE DEBT. As of December 31, 2002, the Company was past due in the
payment of approximately $14.6 million of principal and accrued interest
payments. The Company was also past due with its trade vendors in the payment
of approximately $1.1 million as of December 31, 2002. If the Company is unable
to raise the necessary funds to repay its past due debt or to arrange for
extensions or conversions of such debt, its creditors may sue the Company to
demand payment of the amounts past due. Any action by the Company's creditors
to demand repayment of past due indebtedness is likely to prevent the Company
from continuing as a going concern. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company's past due debt at December 31, 2002 includes approximately $12.7
million of notes and accrued interest which are believed to have been pledged by
the holders of the notes to a bank as collateral for loans made by the bank to
such holders. The Federal Deposit Insurance Corporation ("FDIC") liquidated
this bank during 2000. The Company was notified in December 2000 that the FDIC
sold substantially all the loans and related collateral to Republic Credit
Corporation I ("Republic"). In March 2001, the Company received a demand letter
from Republic for approximately $575,000 of principal plus accrued interest on
the notes, and on July 5, 2001 Republic obtained a default judgment against the
Company for $781,252 plus interest at the rate of 18% per year from and after
February 6, 2001. A settlement was reached on June 20, 2002 with Republic to
settle approximately $11.2 million of principal and accrued interest related to
the notes as of December 31, 2002 for $500,000. The terms of the settlement
required $15,000 to be paid to Republic upon signing of the agreement and the
remaining $485,000 is due upon consummation of the Company's pending merger
transaction with Polar, discussed below. The settlement initially provided that
if the merger transaction with Polar was not completed for any reason on or
before December 31, 2002, the agreement with Republic would be terminated except
that Republic would retain the $15,000 paid by the Company. During November
2002, the Company entered into the first extension agreement with Republic.
Under the terms of the first extension agreement the Company could request up to
three additional one-month extensions of the original settlement deadline of
December 31, 2002. Each one-month extension would be granted to the Company
provided that the Company pay $10,000 prior to the first day of the month of any
such extension to Republic. The Company made an extension payment of $10,000
for January 2003. During January 2003, the Company entered into the second
extension agreement. Under the terms of the second extension agreement, the
Company may request one additional one-month extension to April 30, 2003.
Additionally, under the terms of the second extension agreement, the Company
postponed payment of the February extension fee in exchange for an extension fee
of $25,000 which was due prior to March 1, 2003 for the February and March
extension fees. The Company was unable to make the $25,000 payment and has
received notification from Republic that the Company has defaulted on the
agreement. Republic is in the process of reviewing its options and remedies
under this agreement. If the Company is not able to reach a new extension
agreement with Republic on terms acceptable to the Company, or if Republic takes
action to demand payment of the past-due debt, the Company likely would not be
4
able to continue operating as a going concern or to complete its pending merger
transaction with Polar. Until such time as the Company satisfies all of the
conditions of the settlement agreement (if extended or otherwise amended), the
notes and related interest will remain on the books of the Company and interest
will continue to be accrued.
Buckeye Retirement Co., L.L.C. ("Buckeye") acquired loans and related collateral
from the FDIC and on September 1, 2002 agreed to accept payment of $100,000 in
cash and 475,000 shares of the Company's no par value common stock (the "Common
Stock") in full satisfaction of all principal and interest due under these notes
which totaled $964,452 as of December 31, 2002. The shares to be received by
Buckeye included 225,000 shares to be issued by the Company, 100,000 shares to
be transferred by Guy O. Murdock, 75,000 shares to be transferred by Larry A.
Cahill and 75,000 shares to be transferred by Wayne Wright. The terms of the
settlement required $25,000 to be paid to Buckeye upon signing the agreement and
$75,000 and the shares would be due upon consummation of the Company's pending
merger transaction with Polar. The terms of the settlement provided that if the
merger transaction with Polar was not completed for any reason on or before
March 31, 2003, the agreement with Buckeye would be terminated except that
Buckeye would retain the $25,000 paid by the Company. As the merger transaction
with Polar was not completed by March 31, 2003, the settlement agreement with
Buckeye has terminated. If the Company is not able to reach an agreement with
Buckeye to extend the expiration date of the settlement on terms acceptable to
the Company, or if Buckeye takes action to demand payment of the past-due debt,
the Company likely would not be able to continue operating as a going concern or
to complete its pending merger transaction with Polar. Until such time as the
Company satisfies all of the conditions of the settlement agreement (if extended
or otherwise amended), the notes and related interest will remain on the books
of the Company and interest will continue to be accrued.
MCC continues to engage in discussions with its other creditors to restructure
indebtedness. The obligation of Polar to complete the merger is subject to the
condition that at the effective time of the merger MCC's liabilities will not
exceed its assets, each as determined in accordance with generally accepted
accounting principles, consistent with past practice. Any loans extended by
Polar to MCC or MCC Merger Sub Corporation ("MCC Merger Sub") and liabilities
for professional fees incurred directly related to the merger will be excluded
from the amount of liabilities for purposes of this net worth test and MCC will
also be entitled to a credit against its liabilities for purposes of the net
worth test equal to any portion of certain amounts Polar is required to loan to
MCC that MCC does not receive or chooses not to accept. As of December 31,
2002, MCC's liabilities exceeded its assets by approximately $21.9 million,
excluding loans from Polar and professional fees directly related to the merger.
As of December 31, 2002, MCC had reached agreements with the holders of MCC debt
or other obligations in the aggregate amount of approximately $21.0 million for
the satisfaction of such obligations in exchange for the issuance by MCC of an
aggregate of 4,571,307 shares of Common Stock and the payment by MCC of an
aggregate of $570,000, contingent on the closing of the merger. However, as of
March 7, 2003 the Company is in default on terms of one of these settlement
5
agreements for $11.2 million requiring a cash payment of $485,000 and as of
March 31, 2003, another settlement agreement for $964,452 requiring a cash
payment of $75,000 and the transfer of 475,000 shares of Common Stock had
expired. To satisfy the net worth test by closing, MCC must reach additional
agreements with its creditors to forgive or convert into equity a sufficient
amount of liabilities to cause MCC's liabilities not to exceed its assets as of
the closing of the merger. Any conversions of liabilities to equity will dilute
the outstanding Common Stock held by current MCC shareholders. MCC also must
raise sufficient funds to make all of the payments that may be required under
the agreements with MCC's creditors, and there can be no assurance that such
funds will be available from Polar or otherwise. If MCC is not able to satisfy
the net worth test, Polar will have the right to terminate the merger agreement.
If the merger is not completed for any reason, MCC will continue to be subject
to a significant amount of past-due debt and other liabilities, including the
costs related to the proposed merger, without any source of operating cash flow
to satisfy its liabilities. MCC also would not be able to continue to borrow
from Polar, which has been MCC's principal source of cash since the beginning of
2002. Most of the agreements that MCC has reached with creditors to forgive
debt or convert debt to equity are contingent on the completion of the merger
with Polar. MCC can make no assurance that it would be able to identify another
merger transaction or to reach new agreements with its creditors if the merger
is not completed, and in such event MCC would not be able to continue as a going
concern.
Based on agreements reached by MCC with its creditors as of December 31, 2002,
MCC expects that approximately $570,000 will be needed at or shortly after the
closing of the merger to make required payments to MCC's creditors. MCC must
reach extension or new settlement agreements with Republic and Buckeye and MCC
also has other outstanding debt which MCC is attempting to restructure before
the closing of the merger, and any agreements that MCC may reach with these
creditors may require additional payments at or shortly after the closing of the
merger.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing and
refinancing as may be required. Management's plans concerning these matters are
described in Note 1 to the consolidated financial statements.
MERGER AGREEMENT WITH POLAR. On December 19, 2001, Polar and the Company
entered into an Agreement and Plan of Merger (as amended, the "Merger
Agreement"). Under the terms of the Merger Agreement, the outstanding shares of
Polar's common stock will be converted into the number of shares of Common Stock
equal to 80% of the outstanding shares of the Common Stock as of the
effectiveness of the merger and MCC shareholders will retain a 20% ownership.
The outstanding warrants and options of MCC will remain outstanding after the
6
completion of the merger and the outstanding warrants and options of Polar will
be converted into warrants and options to purchase the Common Stock based on the
exchange ratio in the merger.
Polar develops and markets fuel additives. Polar's primary product, DurAlt(R)FC,
is a patented fuel additive that has been proven effective at reducing
combustion chamber deposits and reducing octane requirement increase in
combustion engines. Polar had a stockholders' deficit of $4.2 million
(unaudited) at September 30, 2002 and revenues for its fiscal year ended March
31, 2002 were $162,000 (unaudited).
The proposed merger is subject to a number of significant conditions, including
approval by the stockholders of the parties, approval of the reincorporation of
MCC in the state of Delaware by MCC's stockholders, filings with Securities and
Exchange Commission, the conversion of the Company's indebtedness into equity, a
limit of 1,000 shares on the number of shares of MCC or Polar common stock that
exercise dissenters' or appraisal rights with respect to the reincorporation or
merger, and other closing conditions. Because there are significant conditions
remaining to be satisfied with respect to the proposed merger, no assurance can
be given that the proposed merger will be consummated or, if consummated, that
the terms of the proposed merger will be as presently contemplated.
EMPLOYEES
As of December 31, 2002, MCC had one employee. The Company's employee is not
subject to a collective bargaining agreement.
MCC's sole employee will receive a severance payment of $3,115 in connection
with the termination of her employment upon the closing of the proposed merger
with Polar. MCC also granted this employee stock options for 10,000 shares of
Common Stock at an exercise price of $0.40, contingent upon the closing of the
proposed merger.
ITEM 2. PROPERTIES
The Company's corporate office is located in Marion, Iowa. The Company leases
this office on a month to month basis.
ITEM 3. LEGAL PROCEEDINGS
On January 17, 2001, Republic filed lawsuits in the U.S. District Court,
Southern District of Iowa, against each of John Rance, Robert M. Upshaw and
Stephen Rance and other individuals to collect on certain promissory notes held
by Republic Credit. On November 23, 2001, the three individuals previously
named, one of which was a former officer and director of the Company, filed a
third party complaint against the Company, several former officers and directors
of the Company and several related parties. These lawsuits allege that the
named individuals and entities devised a scheme to defraud the three plaintiffs
to personally borrow funds from a financial institution, invest the proceeds in
the Company as a note payable with the promise of stock options and repayment of
the notes, and give the financial institution a security interest in the notes
under the Uniform
7
Commercial Code. Unspecified damages sought by the plaintiffs include actual,
punitive, and treble damages and court costs and attorney costs. The Company's
Director and Officer ("D&O") insurance carrier has notified the Company that
because one of the plaintiffs was a former director of the Company, that the D&O
policy will not provide coverage for the claims by that plaintiff. The Company
believes that its D&O policy will provide coverage, up to the policy limit, in
this lawsuit related to the other two plaintiffs. In November 2002, MCC entered
into a settlement agreement providing for the issuance by MCC of 517,000 shares
of Common Stock to the three plaintiffs and one other individual who did not
file suit. The effectiveness of the settlement is contingent on the closing of
the proposed merger with Polar. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
As of December 31, 2002 the Company had been notified by several state taxing
authorities that approximately $46,000 of past due taxes and penalties is
allegedly owed. Some of the states have assigned the alleged amounts due to
collection agencies or filed tax warrants. Management believes that it has
meritorious defenses against these amounts. No assurance can be given that the
Company's defenses are valid or that the Company will not be liable for any part
of the amounts. No loss, if any, has been recorded in the consolidated
financial statements with respect to these matters.
The Company has divested certain of its businesses during 2001 and 2000. As a
result of such divestitures, there may be lawsuits, claims or proceedings
instituted or asserted against the Company related to the period that the
businesses were owned by the Company. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
The FDIC has notified the Company that it believes an additional $770,000 is
outstanding representing various notes payable. Also, in July 2001, the Company
was notified that Peoples Bank had obtained a judgment against a Company
director and shareholder in the amount of $350,000, and that the collateral was
a Company promissory note in the principal amount of $350,000. Another party
has also asserted that he is entitled to $500,000 allegedly outstanding under a
note payable. Management believes that the Company received no funds with
respect to these notes and that it has other defenses. The amount of past due
debt as of December 31, 2002 does not include these amounts. No assurance can
be given as to the ultimate outcome of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
8
PART II
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY
The Common Stock trades on the Over the Counter Bulletin Board under the symbol
"MURC" and the Company's Redeemable Common Stock Purchase Warrants ("Warrants")
trade on the Over the Counter Bulletin Board under the symbol "MURCW." The
following table sets forth the high and low bid quotations for the Common Stock
and Warrants as reported on the Over the Counter Bulletin Board. Such
transactions reflect interdealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
Common Stock Warrants
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Quarter High Low High Low
- ----------- ----- ----- ------ ------
FISCAL 2001
First . . . $0.25 $0.05 $ 0.05 $ 0.02
Second. . . 0.10 0.03 0.05 0.01
Third . . . 0.45 0.03 0.10 0.01
Fourth. . . 0.18 0.05 0.045 0.005
FISCAL 2002
First . . . 0.18 0.08 0.01 0.01
Second. . . 0.18 0.08 0.01 0.008
Third . . . 0.23 0.06 0.008 0.008
Fourth. . . 0.48 0.18 0.02 0.005
At December 31, 2002, there were approximately 140 holders of record of Common
Stock.
The Company has not paid any cash dividends on the Common Stock in the last
three years. Certain of the Company's current financing agreements contain
restrictions on the payment of dividends. The Company does not anticipate
paying any cash dividends in the foreseeable future.
9
RECENT SALES OF UNREGISTERED SECURITIES
During 2002, the Company issued warrants to purchase a total of 14,166 shares of
Common Stock to Murdock Communications Corporation Investment Company ("MCCIC"),
a company owned 50% by Berthel and 50% by another significant shareholder of the
Company, in connection with advances obtained from MCCIC.
The warrants were issued at exercise prices ranging from $0.08 per share to
$0.17 per share with five year terms. The warrants were issued in private
placements exempt from the registration requirements of the Securities Act of
1933, amended (the "Act"), pursuant to Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data in respect of the
Company's continuing operations. The selected financial information set forth
in the table below is not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, related notes and independent auditors'
report, contained herein. The statement of operations data for the five years
ended December 31, 2002 and the related balance sheet data have been derived
from the audited consolidated financial statements of the Company. These
financial statements were prepared on a going concern basis.
10
2002 2001 2000 (a) 1999(b) 1998 (c)
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues. . . . . . . . . . . . . . $ - $ 22 $ 191 $ 4,313 $ 5,263
Income (loss) from continuing operations. (2,941) (3,033) 152 (9,161) (1,967)
Basic and diluted net loss
per common share
Loss from continuing operations. . . (0.24) (0.25) - (0.90) (0.40)
Balance Sheet Data: (at end of year)
Total assets. . . . . . . . . . . . . . . $ 9 $ 15 $ 277 $ 10,462 $ 12,911
Notes payable . . . . . . . . . . . . . . 13,800 8,766 8,783 14,426 2,487
Long-term debt. . . . . . . . . . . . . . - 4,632 4,632 3,820 5,347
Total liabilities . . . . . . . . . . . . 22,468 19,537 18,030 24,226 8,834
Redeemable preferred stock. . . . . . . . - - - 1,868 1,837
Shareholders' equity (deficit). . . . . . (22,459) (19,522) (17,753) (15,632) 2,240
(a) Includes: a $990,000 charge for the write-down of the Company's investment
in the AcNet entities; a $1.6 million charge for impairment of investment
in Actel and a gain of $7.0 million recorded in connection with a Debt
Restructuring Plan (See Notes 4 and 6 to the consolidated financial
statements).
(b) Includes: a $3.7 million charge for the write-down of the Company's
investment in the AcNet entities.
(c) Includes a gain of $453,000 relating to the termination of the Company's
agreement with AT&T.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Previously the Company had three reportable segments. The Company sold its PIC
segment in July 2001 and its Incomex segment in June 2000. The other reportable
segment (MTS) had investments in the AcNet entities, which were written off in
1999 and 2000, and Actel preferred stock and operated a telecommunications
services business whose primary asset was sold in 2000. Actel filed for
bankruptcy under Chapter 11 on April 11, 2001. As a result, the Company
recorded an impairment charge of $1.6 million in 2000, due to the uncertainty of
ultimate recovery of its investment in Actel. On September 14, 2001, Actel's
case was converted to a case under Chapter 7.
The accompanying statements of operations have been reclassified so that the
results for the two segments sold in 2000 and 2001 are classified as
discontinued operations for all periods presented.
As of the date of this report, the Company has a large amount of past due debt
and has also experienced significant cash flow difficulties.
The Company has an agreement with Polar for a proposed merger transaction. If
this transaction is not successful, the Company may not be able to continue
operating as a going concern. See "- Liquidity and Capital Resources" below.
12
RESULTS OF OPERATIONS
Years ended December 31,
------------------------
2002 2001 2000
------ ------- ------
Revenues . . . . . . . . . . . . . . $ - $ 22 $ 191
Cost of sales. . . . . . . . . . . . - - 335
Selling, general, and administrative 709 742 575
Depreciation and amortization. . . . - 6 36
Impairment of assets . . . . . . . . - - 2,672
Interest expense . . . . . . . . . . 2,235 2,304 3,431
Other income (expense) . . . . . . . 3 (3) 7,001
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expense decreased $33,000 to $709,000 for the year ended
December 31, 2002 from $742,000 for the year ended December 31, 2001. The
decrease is primarily related to lower rents and consulting fees.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
amortization expense declined $6,000 to $0 for the year ended December 31, 2002.
The decline is due to all assets being fully depreciated at December 31, 2001.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, declined $69,000 to $2,235,000 for the year ended December 31, 2002
from $2,304,000 in 2001. The decrease is due to the reduction of debt
associated with the sale of PIC.
OTHER INCOME (EXPENSE) - Consolidated other income (expense) increased $6,000 to
$3,000 income for the year ended December 31, 2002 from a $3,000 expense for the
year ended December 31, 2001. The increase is due to funds from workers
compensation insurance received in 2002.
13
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expense increased $167,000 to $742,000 for the year ended
December 31, 2001 from $575,000 for the year ended December 31, 2000. The
increase is primarily related to employee severance.
DEPRECIATION AND AMORTIZATION EXPENSE- Consolidated depreciation and
amortization expense declined $30,000, to $6,000 for the year ended December 31,
2001 from $36,000 for year ended December 31, 2000. The decline is due to
impairments recorded in 1999 and 2000. All assets are fully depreciated at
December 31, 2001.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, declined $1,127,000 to $2,304,000 for the year ended December 31, 2001
from $3,431,000 in 2000. The decline is due to the reduction of debt associated
with the sale of the two business segments and the Debt Restructuring Plan.
OTHER INCOME (EXPENSE) - Consolidated other income (expense) declined $7.0
million to a $3,000 expense for the year ended December 31, 2001 from a
$7,001,000 income for the year ended December 31, 2000. The decrease was
primarily due to a pre-tax gain of $7.0 million recorded in connection with the
Debt Restructuring Plan completed in the second quarter of 2000 (see Note 6 to
Notes to Financial Statements).
DISCONTINUED OPERATIONS
PIC - Effective July 31, 2001, the Company sold all the shares of PIC to
Dartwood, LLC for a total purchase price of $196,000, comprised of $100,000 cash
and a non-interest bearing promissory note of $96,000 payable in 24 monthly
installments of $4,000. The Company assigned the cash payment of $100,000 and
the promissory note to MCCIC to repay $196,000 of outstanding debt. Wayne
Wright, a director, executive officer and shareholder of the Company is the
father of the owner of Dartwood, LLC. The disposition was recorded in the third
quarter of 2001 and resulted in a gain of approximately $1.3 million for the
Company.
INCOMEX - Effective June 30, 2000 the Company sold all the shares of Incomex,
Inc., a wholly owned subsidiary, to three of the former shareholders of Incomex,
for (a) transfer to the Company by the purchasers of 250,000 shares of the
Company's Common Stock originally issued by the Company pursuant to the
Company's acquisition of Incomex, (b) cancellation and forgiveness of all
amounts outstanding under promissory notes in the aggregate principal amount of
$684,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex, and (c) the cancellation of all employment compensation
and employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company and
Incomex and claims that the Company may have against the former shareholders of
Incomex. Incomex is primarily engaged in the business of providing billing and
collections services to the hospitality industry from Mexico to the United
States.
As a result of the sale of Incomex described above, the Company recorded a loss
on disposition of $332,000 in the second quarter of 2000.
14
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, MCC's current liabilities of $22.5 million exceeded
current assets of $8,000, resulting in a working capital deficit of $22.5
million. During the year ended December 31, 2002, MCC used $404,000 in cash for
operating activities of continuing operations. The Company's principal source
of cash during 2002 were loans from Polar. During 2002, the Company received
loans in the aggregate amount of $394,787 from Polar. The Company also received
advances in the aggregate amount of $7,083 from MCCIC. The Company issued
warrants to purchase a total of 14,166 shares of Common Stock to MCCIC in
connection with these advances. The warrants were issued at exercise prices
ranging from $0.08 per share to $0.17 per share with five year terms. MCCIC has
no commitment to make any future advances to the Company.
The Company must raise sufficient funds to make payments that may be required
under agreements with the Company's creditors. The Company also must fund its
current operations which average $50,000 per month and expenses associated with
completing the proposed merger with Polar. MCC's only future source of cash is
expected to come from Polar. MCC has no operating activities and no source of
operating cash flow. If MCC is unsuccessful in continuing to obtain financing
from Polar, MCC may not be able to continue as a going concern.
The Company's debt totaled $13.8 million as of December 31, 2002, compared with
$13.4 million as of December 31, 2001. As of December 31, 2002, the Company was
past due in the payment of approximately $14.6 million of principal and accrued
interest payments. The Company was also past due with its trade vendors in the
payment of approximately $1.1 million as of December 31, 2002. If the Company
is unable to raise the necessary funds to repay its past due debt or to arrange
for extensions or conversions of such debt, its creditors may sue the Company to
demand payment of the amounts past due. Any action by the Company's creditors
to demand repayment of past due indebtedness is likely to prevent the Company
from continuing as a going concern.
The Company's past due debt at December 31, 2002 includes approximately $12.7
million of notes and accrued interest which are believed to have been pledged by
the holders of the notes to a bank as collateral for loans made by the bank to
such holders. The FDIC liquidated this bank during 2000. The Company was
notified in December 2000 that the FDIC sold substantially all the loans and
related collateral to Republic. In March 2001, the Company received a demand
letter from Republic for approximately $575,000 of principal plus accrued
interest on the notes, and on July 5, 2001 Republic obtained a default judgment
against the Company for $781,252 plus interest at the rate of 18% per year from
and after February 6, 2001. A settlement was reached on June 20, 2002 with
Republic to settle approximately $11.2 million of principal and accrued interest
related to the notes as of December 31, 2002 for $500,000. The terms of the
settlement required $15,000 to be paid to Republic upon signing of the agreement
and the remaining $485,000 is due upon consummation of the Company's pending
merger transaction with Polar. The settlement initially provided that if the
merger transaction with Polar was not completed for any reason on or before
15
December 31, 2002, the agreement with Republic would be terminated except that
Republic would retain the $15,000 paid by the Company. During November 2002, the
Company entered into the first extension agreement with Republic. Under the
terms of the first extension agreement the Company could request up to three
additional one-month extensions of the original settlement deadline of December
31, 2002. Each one-month extension would be granted to the Company provided that
the Company pay $10,000 prior to the first day of the month of any such
extension to Republic. The Company made an extension payment of $10,000 for
January 2003. During January 2003, the Company entered into the second extension
agreement. Under the terms of the second extension agreement, the Company may
request one additional one-month extension to April 30, 2003. Additionally,
under the terms of the second extension agreement, the Company postponed payment
of the February extension fee in exchange for an extension fee of $25,000 which
was due prior to March 1, 2003 for the February and March extension fees. The
Company was unable to make the $25,000 payment and has received notification
from Republic that the Company has defaulted on the agreement. Republic is in
the process of reviewing its options and remedies under this agreement. If the
Company is not able to reach a new extension agreement with Republic on terms
acceptable to the Company, or if Republic takes action to demand payment of the
past-due debt, the Company likely would not be able to continue operating as a
going concern or to complete its pending merger transaction with Polar. Until
such time as the Company satisfies all of the conditions of the settlement
agreement (as it may be extended or otherwise amended), the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
Buckeye acquired loans and related collateral from the FDIC and on September 1,
2002 agreed to accept payment of $100,000 in cash and 475,000 shares of Common
Stock in full satisfaction of all principal and interest due under these notes
which totaled $964,452 as of December 31, 2002. The shares to be received by
Buckeye included 225,000 shares to be issued by the Company, 100,000 shares to
be transferred by Guy O. Murdock, 75,000 shares to be transferred by Larry A.
Cahill and 75,000 shares to be transferred by Wayne Wright. The terms of the
settlement required $25,000 to be paid to Buckeye upon signing the agreement and
$75,000 and the shares would be due upon consummation of the Company's pending
merger transaction with Polar. The terms of the settlement provided that if the
merger transaction with Polar was not completed for any reason on or before
March 31, 2003, the agreement with Buckeye would be terminated except that
Buckeye would retain the $25,000 paid by the Company. As the merger transaction
with Polar was not completed by March 31, 2003, the settlement agreement with
Buckeye has terminated. If the Company is not able to reach an agreement with
Buckeye to extend the expiration date of the settlement on terms acceptable to
the Company, or if Buckeye takes action to demand payment of the past-due debt,
the Company likely would not be able to continue operating as a going concern or
to complete its pending merger transaction with Polar. Until such time as the
Company satisfies all of the conditions of the settlement agreement (if extended
or otherwise amended), the notes and related interest will remain on the books
of the Company and interest will continue to be accrued.
16
MCC continues to engage in discussions with its other creditors to restructure
indebtedness. The obligation of Polar to complete the merger is subject to the
condition that at the effective time of the merger MCC's liabilities will not
exceed its assets, each as determined in accordance with generally accepted
accounting principles, consistent with past practice. Any loans extended by
Polar to MCC or MCC Merger Sub and liabilities for professional fees incurred
directly related to the merger will be excluded from the amount of liabilities
for purposes of this net worth test and MCC will also be entitled to a credit
against its liabilities for purposes of the net worth test equal to any portion
of certain amounts Polar is required to loan to MCC that MCC does not receive or
chooses not to accept. As of December 31, 2002, MCC's liabilities exceeded its
assets by approximately $21.9 million, excluding loans from Polar and
professional fees directly related to the merger. As of December 31, 2002, MCC
had reached agreements with the holders of MCC debt or other obligations in the
aggregate amount of approximately $21.0 million for the satisfaction of such
obligations in exchange for the issuance by MCC of an aggregate of 4,571,307
shares of Common Stock and the payment by MCC of an aggregate of $570,000,
contingent on the closing of the merger. However, as of March 7, 2003 the
Company is in default on terms of one of these settlement agreements for $11.2
million requiring a cash payment of $485,000 and as of March 31, 2003, another
settlement agreement for $964,452 requiring a cash payment of $75,000 and the
transfer of 475,000 shares of Common Stock had expired. To satisfy the net worth
test by closing, MCC must reach additional agreements with its creditors to
forgive or convert into equity a sufficient amount of liabilities to cause MCC's
liabilities not to exceed its assets as of the closing of the merger. Any
conversions of liabilities to equity will dilute the outstanding Common Stock
held by current MCC shareholders. MCC also must raise sufficient funds to make
all of the payments that may be required under the agreements with MCC's
creditors, and there can be no assurance that such funds will be available from
Polar or otherwise. If MCC is not able to satisfy the net worth test, Polar will
have the right to terminate the merger agreement.
If the merger is not completed for any reason, MCC will continue to be subject
to a significant amount of past-due debt and other liabilities, including the
costs related to the proposed merger, without any source of operating cash flow
to satisfy its liabilities. MCC also would not be able to continue to borrow
from Polar, which has been MCC's principal source of cash since the beginning of
2002. Most of the agreements that MCC has reached with creditors to forgive
debt or convert debt to equity are contingent on the completion of the merger
with Polar. MCC can make no assurance that it would be able to identify another
merger transaction or to reach new agreements with its creditors if the merger
is not completed, and in such event MCC would not be able to continue as a going
concern.
Based on agreements reached by MCC with its creditors as of December 31, 2002,
MCC expects that approximately $570,000 will be needed at or shortly after the
closing of the merger to make required payments to MCC's creditors. MCC must
reach extension or new settlement agreements with Republic and Buckeye and MCC
also has other outstanding debt which MCC is attempting to restructure before
the closing of the merger, and any agreements that MCC may reach with these
creditors may require additional payments at or shortly after the closing of the
merger.
17
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported expenses during the reporting period. Management bases its
estimates on historical experience and on various other assumptions and
information that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from estimates under
different assumptions or conditions.
Management believes that there are not any particular accounting policies that
are more significant than others that are used in the preparation of the
consolidated financial statements as the Company does not currently have any
continuing operations. Accounting policies are further disclosed in Note 1 to
the consolidated financial statements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145. This statement, among other
things, significantly limits the situations whereby the extinguishments of debt
is treated as an extraordinary item in the statement of operations. This
statement requires reclassification of all prior period extraordinary items
related to debt extinguishments. The provisions of this statement are effective
for fiscal years beginning after May 15, 2002.
FORWARD-LOOKING STATEMENTS
This report contains statements, including statements of management's belief or
expectation, which may be forward-looking within the meaning of applicable
securities laws. Such statements are subject to known and unknown risks and
uncertainties that could cause actual future results and developments to differ
materially from those currently projected. Such risks and uncertainties
include, among others, the following:
- - the Company's access to adequate funds to meet the Company's financial
needs and to repay its past due debt, and the Company's ability to continue
as a going concern if it is unable to access adequate financing;
- - the possibility that the Company's creditors may take legal action for the
repayment of past due indebtedness and the ability of the Company to
continue as a going concern if any such action is taken;
- - the Company's ability to complete the proposed merger transaction with
Polar and the terms of such transaction if completed;
18
- - the Company's ability to restructure its past due debt;
- - risks relating to Polar's business operations;
- - the Company's ability to continue as a going concern if it cannot
restructure its past due debt or complete the pending merger transaction
with Polar;
- - the outcome of pending litigation;
- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
- - various other factors discussed in this Annual Report on Form 10-K.
The Company will not update the forward-looking information to reflect actual
results or changes in the factors affecting the forward-looking information.
The forward-looking information referred to above includes any matters preceded
by the words "anticipates," "believes," "intends," "plans," "expects" and
similar expressions as they relate to the Company and include, but are not
limited to:
- - expectations regarding the Company's financial condition and liquidity, as
well as future cash flows; and
- - expectations regarding alternatives to restructure the Company's business
and reduce its overall debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any foreign currency exchange risk or commodity price
risk. All of the Company's debt was at a fixed interest rate at December 31,
2002 and 2001 and, therefore, the Company is not impacted by changes in interest
rates related to the debt. The interest rates range from 10% to 18%. The
Company had outstanding fixed rate long-term debt obligations with carrying
values of $0 million and $4.6 million at December 31, 2002 and 2001,
respectively. The fair value of this debt was zero at December 31, 2002 and
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, notes thereto and related
financial statement schedule are filed under this item beginning on page F-1 of
this report.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain information with respect to the directors
and executive officers of the Company as of December 31, 2002.
DIRECTOR
NAME, AGE, PRINCIPAL OCCUPATION FOR PAST FIVE YEARS AND DIRECTORSHIPS AGE SINCE
- ------------------------------------------------------------------------------------ --- --------
GUY O. MURDOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1989
Mr. Murdock has been a private investor since January 2000. He served as
Chairman of the Board of the Corporation from 1989 to January 2000, as Chief
Executive Officer of the Corporation from 1989 to April 1997 and as President of the
Corporation from 1989 to July 1996.
WAYNE WRIGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 1997
Mr. Wright served as President of Priority International Communications, Inc. (a
wholly-owned subsidiary of the Corporation from October 1997 to July 2001) from
March 1997 to July 2001 and as Chairman of the Board of Priority International
Communications, Inc. from 1996 to 1997. Effective October 2001, Mr. Wright began
serving as the Company's Principal Accounting Officer.
DAVID KIRKPATRICK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 2000
Mr. Kirkpatrick has been a private investor since 1992. Mr. Kirkpatrick served as a
consultant to a law firm from 1991 to 1992 and as a partner of Peat Marwick (an
accounting firm) from 1962 to 1991, most recently as Managing Partner of the
Houston office.
EUGENE I. DAVIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2000
Mr. Davis has served as Chairman of the Board and Chief Executive Officer since
August 2002. Previously Mr. Davis served as Chairman of the Board and Chief
Executive Officer from May 2000 to October 9, 2001 when he resigned, but remained
on the Board. Mr. Davis served as Interim Chairman of the Board and Interim Chief
Executive Officer of the Corporation from January 2000 through May 2000. He has
served as Chairman of the Board and Chief Executive Officer of Pirinate Consulting
Group, LLC (a privately held consulting firm) since 1999 and as Chief Executive
Officer of SmarTalk Teleservices, Inc. (a prepaid calling card provider) since 1999.
Mr. Davis served as Chief Operating Officer of Total-Tel USA Communications, Inc.
(a telecommunications provider) from 1998 to 1999. Mr. Davis served as President
of Emerson Radio Corp. (a consumer electronics products distributor) from 1994 to
1997 and has served as Vice Chairman of the Board until 1997 and as a director from
1992 to 1997.
20
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Company's equity securities. The rules promulgated by the SEC under Section
16(a) of the Exchange Act require those persons to furnish the Company with
copies of all reports filed with the SEC pursuant to Section 16(a). Based
solely upon a review of such forms actually furnished to the Company and written
representations of certain of the Company's directors and executive officers,
all directors, executive officers and 10% shareholders have filed with the SEC
on a timely basis all reports required to be filed under Section 16(a) of the
Exchange Act during 2002.
ITEM 11. EXECUTIVE COMPENSATION.
CASH AND OTHER COMPENSATION. The table which follows sets forth certain
information concerning compensation paid to, earned by or awarded to Eugene I.
Davis, the Company's Chairman of the Board and Chief Executive Officer and Wayne
Wright, the Company's Principal Accounting Officer. Mr. Davis and Mr. Wright
are referred to in this report as the "named executive officers."
Summary Compensation Table
Long-Term
Compensation
Awards
Annual Compensation Securities
------------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- ----------------------------- -------- --------- --------- ------------- ----------------
Eugene I. Davis 2002 - - - 15,000 (2)
Chairman of the Board and 2001 - - - 121,187 (2)
Chief Executive Officer (1) 2000 - - - 181,109 (2)
Wayne Wright 2002 48,000 (3) - - -
Principal Accounting Officer 2001 - - - -
2000 - - - -
(1) Mr. Davis served as Chairman of the Board and Chief Executive Officer of Murdock from May 2000
to October 2001. Mr. Davis resigned as Chief Executive officer on October 9, 2001 and resumed service
as Chief Executive Officer on August 1, 2002. Mr. Davis served as Interim Chairman on of the Board and
Interim Chief Executive Officer from January 2000 through May 2000. Mr. Davis' services are
contracted through Pirinate Consulting Group, LLC ("Pirinate"), an entity controlled by Mr. Davis.
(2) Represents amounts earned by Pirinate, during fiscal 2000, 2001 and 2002.
(3) Represents accrued compensation of $4,000 per month.
21
OPTIONS GRANTED DURING 2002. There were no stock options granted to the named
executive officers of the Company during the year ended December 31, 2002.
FISCAL YEAR-END OPTION VALUES. There were no unexercised options held by the
named executive officers at December 31, 2002.
CONSULTING AGREEMENTS
On January 10, 2000, the Company entered into a letter agreement with Pirinate,
an entity controlled by Eugene I. Davis, for the personal services of Mr. Davis
as the Company's Interim Chairman of the Board and Interim Chief Executive
Officer. Pirinate received $15,000 a month, plus out-of-pocket expenses, for
these services. The initial term of this agreement was three months.
Thereafter, either party could terminate this agreement, with or without cause,
effective upon sixty days prior written notice. The parties agreed in May 2000
that Mr. Davis would serve as Chairman of the Board and Chief Executive Officer
of the Company. Effective July 1, 2001 this agreement was modified to provide
for a payment of $10,000 a month through September 30, 2001 at which time the
agreement terminated. Mr. Davis resigned on October 9, 2001 as Chief Executive
Officer and remained on the Board of Directors.
The Company entered into an agreement dated August 1, 2002, as amended, with
Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to
serve as Chairman of the Board and Chief Executive Officer effective August 1,
2002. Under the agreement, the Company issued 40,000 shares of Common Stock to
Pirinate in satisfaction of unpaid fees for Mr. Davis' past services and the
Company agreed to pay Pirinate $3,000 per month during the term of Mr. Davis'
services. The Company also agreed to pay contingent compensation of 4,000
shares of Common Stock per month, contingent upon the closing of the proposed
merger with Polar.
COMPENSATION OF DIRECTORS
The Company pays Mr. Kirkpatrick a monthly retainer equal to the greater of (a)
$1,000 or (b) $1,000 for each meeting of the Board of Directors attended. In
addition, in January 2000 the Company issued options to Mr. Kirkpatrick to
purchase up to 20,000 shares of Common Stock, 10,000 of which were fully vested
at the time of issuance and 10,000 of which vested on January 1, 2001, with an
exercise price of $2.25 per share. Through its letter agreement with Pirinate,
Pirinate receives compensation for making Mr. Davis available to serve as MCC's
Chairman of the Board and Chief Executive Officers as described under
"Consulting Agreements" above. Mr. Wright accrues compensation at the rate of
$4,000 per month for serving as Principal Accounting Officer. Mr. Kirkpatrick
and Mr. Wright have agreed to convert all accrued compensation into shares of
Common Stock at the time of the proposed merger with Polar at a rate of $3.03
per share for compensation accrued before August 1, 2002 and at a rate of $1.00
per share for compensation accrued on of after August 1, 2002. As of December
31, 2002, $48,000 of compensation was accrued with respect to Mr. Wright and
$22,000 of compensation was accrued with respect to Mr. Kirkpatrick. Mr.
Murdock does not receive any compensation for serving on MCC's board of
directors.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
SECURITY OWNERSHIP
The following table sets forth information as of December 31, 2002 regarding the
beneficial ownership of shares of Common Stock by (a) each person who is known
to the Company to be the beneficial owner of more that 5% of the Common Stock,
(b) each director, director nominee and named executive officer (as defined
above) and (c) all directors and executive officers as a group.
Beneficial ownership of Common Stock has been determined for this purpose in
accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange Commission
("SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"), which
provide, among other things, that a person is deemed to be the beneficial owner
of Common Stock if such person, directly or indirectly, has or shares voting
power or investment power with respect to the Common Stock or has the right to
acquire such ownership within sixty days after December 31, 2002.
23
SHARES BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER (1) OWNED (2) OF CLASS
- ---------------------------- ------------------- --------
Eugene Davis . . . . . . . . . . . . . . . . . . . 40,000 *
David Kirkpatrick (3) . . . . . . . . . . . . . . 20,000 *
Guy O. Murdock (4) . . . . . . . . . . . . . . . . 808,481 6.5
Wayne Wright (5) . . . . . . . . . . . . . . . . . 2,720,067 22.0
Berthel Fisher & Company (6) . . . . . . . . . . . 8,935,073 45.9
Larry A. Cahill (7). . . . . . . . . . . . . . . . 8,367,519 44.6
All directors and executive officers
as a group (4 persons) (8). . . . . . . . . . . . 3,588,548 28.5
* Less than 1%.
(1) Unless otherwise indicated, the address of each person listed in the table
is c/o Murdock Communications Corporation, 701 Tama Street, Marion, Iowa
52302.
(2) This table is based upon information supplied by directors, executive
officers and principal shareholders. Unless otherwise indicated in
footnotes to this table, each of the shareholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned.
(3) Consists of 20,000 shares subject to exercise of options.
24
(4) Includes 195,000 shares subject to exercise of warrants.
(5) Includes 1,580,067 shares owned by a trust of which Mr. Wright is trustee,
80,000 shares subject to exercise of warrants and 250,000 shares held by
Mr. Wright's spouse.
(6) Includes (i) 3,242,697 shares of Common Stock held by certain affiliates of
Berthel for which Berthel shares voting and investment power, including
401,879 shares subject to exercise of warrants and 1,172,278 shares subject
to conversion of convertible notes (based upon $3,551,996 of principal and
interest outstanding under such notes as of December 31, 2002, divided by
the conversion rate of $3.03 per share; (ii)5,392,887 shares subject to the
exercise of warrants held by MCCIC, a company owned by Bethel and Larry A.
Cahill; (iii)299,489 shares directly owned by Berthel, including 75,000
shares subject to the exercise of warrants and 110,917 shares subject to
the conversion of convertible notes (based upon $336,078 of principal and
interest outstanding under such notes as of December 31,2002, divided by
the conversion rate of $3.03 per share). Reflects information reported in a
Schedule 13D filed with the SEC by Berthel on January 16, 1997, as amended
on June 6, 1997, January 8, 1998, May 1, 1998, June 22, 1998, August 6,
1998 and January 15, 1999, as well as certain other information provided to
MCC. The address of Berthel is 701 Tama Street, PO Box 609, Marion, Iowa
52302-0609.
(7) Includes 600,000 shares subject to exercise of warrants, 473,564 shares
subject to conversion of convertible notes (based upon $1,434,899 of
principal and interest outstanding under such notes as of December 31,
2002, divided by the conversion rate of $3.03 per share), 828,529 shares
owned by a family limited liability company and 24,734 shares owned by two
trusts of which Mr. Cahill is trustee. Also includes 5,392,887 shares
subject to the exercise of warrants held by MCCIC, a company owned by
Berthel and Mr. Cahill. Mr. Cahill's address is 3330 Southgate Court S.W.,
Cedar Rapids, Iowa 52404
(8) Includes 20,000 shares subject to exercise of options and 275,000 shares
subject to exercise of warrants.
25
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share information, as of December 31, 2002,
for the Company's equity compensation plans, including the Company's 1993 Stock
Option Plan and the Company's 1997 Stock Option Plan. The 1993 Stock Option
Plan was approved by the Company's shareholders, and the 1997 Stock Option Plan
was not approved by the Company's shareholders.
NUMBER OF NUMBER OF
COMMON SHARES TO BE WEIGHTED-AVERAGE COMMON SHARES
ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
- ------------- ----------------------- --------------------- ---------------------
Equity compensation plans approved
by stockholders. . . . . . . . . . . . . . . . . . . - $ - 253,029
Equity compensation plans not approved
by stockholders . . . . . . . . . . . . . . . . . . 20,000 2.25 1,707,471
-------------------- --------------------- ------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . 20,000 $ 2.25 1,960,500
==================== ===================== ==================
The Company adopted the 1997 Stock Option Plan in 1997. During 1998, the
Company amended the 1997 Stock Option Plan to increase the number of shares
authorized to 1,727,471. The 1997 Stock Option Plan is administered by the
Compensation Committee or the Board of Directors which determines to whom the
options will be granted. The 1997 Stock Option Plan provides for the grant of
incentive stock options (as defined in Section 422 of the Internal Revenue Code)
or nonqualified stock options to executives or other key employees of the
Company. The exercise price of the stock options granted under the 1997 Stock
Option Plan is established by the Compensation Committee or the Board of
Directors, but the exercise price may not be less than the fair market value of
the common stock on the date of the grant for incentive stock options. Each
option shall be for a term not to exceed ten years after the date of grant for
non-employee directors and five years for certain shareholders. Options cannot
be exercised until the vesting period, if any, specified by the Compensation
Committee or the Board of Directors has expired.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From 1991 to 1998, the Company obtained lease and other financing services from
Berthel and its subsidiaries and their affiliated leasing partnerships. These
financing arrangements have been converted into promissory notes that accrue
interest at the rate of 12% per year. As of December 31, 2002, the Company owed
Berthel a total of approximately $4.1 million of principal and accrued interest
under these notes. Berthel has agreed that at the time of the proposed merger
with Polar, all principal and interest under these notes as of June 30, 2002
will convert to Common Stock at the rate of $3.03 per share, and any interest
accrued after June 30, 2002 will be forgiven. Berthel is the beneficial owner
of approximately 45.9% of the Common Stock as of December 31, 2002.
26
In December 1999, Berthel entered into a Standstill Agreement with the Company.
Under the Standstill Agreement, Berthel indicated its intention to form a
creditors committee to represent the interest of Berthel and other creditors of
the Company. The Company agreed to provide the creditors committee with access
to information regarding the Company and its business and to advise the
creditors committee in advance regarding certain significant corporate
developments. The creditors committee may also demand that the Company take
certain actions with respect to the Company's assets and business. The members
of the creditors committee agreed to forebear from taking actions to collect
past due debt owed by the Company in the absence of the unanimous approval of
the creditors committee. As of December 31, 2002, the Company and Berthel are
the only parties to the Standstill Agreement and Berthel is the only member of
the creditors committee.
In December 1999, the Company entered into a financial advisory agreement with
Berthel Fisher & Company Financial Services, Inc. ("Berthel Financial
Services"), an investment banking affiliate of Berthel. Under this agreement,
Berthel Financial Services agreed to provide investment banking services and
advice regarding the identification and investigation of strategic alternatives
available to the Company. This agreement, which was in effect until July 1,
2001, required MCC to pay Berthel Financial Services a nonrefundable $30,000
retainer and a retainer fee of $15,000 per month. On July 1, 2001, the Company
entered into a new financial advisory agreement with Berthel Financial Services,
which requires the Company to pay Berthel Financial Services a retainer fee of
$20,000 per month. Retainer fees under the July 1, 2001 agreement have been
accruing on a monthly basis. As of December 31, 2002, MCC owed Berthel
Financial Services a total of approximately $442,111 for accrued fees and
expenses under these agreements.
The Company has also subleased office space from Berthel Fisher & Company
Management Corp. ("Berthel Management"), an affiliate of Berthel, since October
2001 on a month-to-month basis. The Company owes Berthel Management
approximately $7,500 in rental payments as of December 31, 2002.
Berthel Financial Services and Berthel Management have agreed that upon
completion of the proposed merger with Polar, they will convert all amounts due
to them by the Company into a total of 840,000 shares of Common Stock.
As of December 31, 2002, the Company owed a total of approximately $730,303 to
MCCIC, a company owned by Berthel and Larry A. Cahill. These borrowings accrue
interest at the rate of 12% per year. MCCIC has agreed that at the time of the
proposed merger with Polar, it will convert $526,669 of the outstanding debt
into shares of Common Stock at a rate of $2.00 per share. MCCIC has agreed to
convert all other debt, including accrued interest, into shares of Common Stock
at the rate of $1.00 per share at the time of the proposed merger. Mr. Cahill
beneficially owns approximately 44.6% of the Common Stock outstanding as of
December 31, 2002. During 2002, the Company issued warrants to purchase a total
of 14,166 shares of Common Stock to MCCIC in connection with advances obtained
from MCCIC. The warrants were issued at exercise prices ranging from $0.08 per
share to $0.17 per share with five year terms.
27
The Company has issued certain promissory notes to Larry A. Cahill and Guy O.
Murdock, a member of MCC's board of directors. Mr. Cahill and Mr. Murdock have
agreed that upon completion of the proposed merger, they will convert all
principal and accrued interest as of June 30, 2002 into shares of Common Stock
at the rate of $3.03 per share and will forgive all interest accrued after June
30, 2002. As of December 31, 2002, the Company owed approximately $1.6 million
to Mr. Cahill and approximately $217,019 to Mr. Murdock. These borrowings
accrue interest at the rate of 12% and 18%, respectively, per year.
On January 10, 2000, the Company entered into a letter agreement with Pirinate,
an entity controlled by Eugene I. Davis, for the personal services of Mr. Davis
as the Company's Interim Chairman of the Board and Interim Chief Executive
Officer. Pirinate received $15,000 a month, plus out-of-pocket expenses, for
these services. The initial term of this agreement was three months.
Thereafter, either party could terminate this agreement, with or without cause,
effective upon sixty days prior written notice. The parties agreed in May 2000
that Mr. Davis would serve as Chairman of the Board and Chief Executive Officer
of the Company. Effective July 1, 2001 this agreement was modified to provide
for a payment of $10,000 a month through September 30, 2001 at which time the
agreement terminated. Mr. Davis resigned on October 9, 2001 as Chief Executive
Officer and remained on the Board of Directors.
The Company entered into an agreement dated August 1, 2002, as amended, with
Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to
serve as Chairman of the Board and Chief Executive Officer effective August 1,
2002. Under the original agreement, the Company issued 40,000 shares of Common
Stock to Pirinate in satisfaction of unpaid fees for Mr. Davis' past services
and the Company agreed to pay Pirinate $3,000 per month during the term of Mr.
Davis' services. The Company also agreed to pay contingent compensation of
4,000 shares of Common Stock per month, contingent upon the closing of the
proposed merger with Polar.
Wayne Wright, MCC's Principal Accounting Officer and member of the Company's
board of directors, accrues compensation at the rate of $4,000 per month and
David Kirkpatrick, a member of the Company's board of directors, accrues
compensation monthly at the rate equal to the greater of (a) $1,000 per month or
(b) $1,000 for each meeting of the board of directors attended during such
month. Mr. Kirkpatrick and Mr. Wright have agreed to convert all accrued
compensation into shares of Common Stock at the time of the proposed merger at a
rate of $3.03 per share for compensation accrued before August 1, 2002 and at a
rate of $1.00 per share for compensation accrued on of after August 1, 2002. As
of December 31, 2002, $48,000 of compensation was accrued with respect to Mr.
Wright and $22,000 of compensation was accrued with respect to Mr. Kirkpatrick.
28
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Principal Accounting Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d -14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of a date within
90 days prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls. There were no
significant deficiencies or material weaknesses noted in our most recent
evaluation and, therefore, there were no corrective actions taken with
respect thereto.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements- See Index to Financial Statements on page F-1 of
this Report.
2. Financial Statement Schedules - See Index to Financial Statements on
page F-1 of this Report. All other schedules are omitted since they
are not required, are inapplicable, or the required information is
included in the financial statements or notes thereto.
3. Exhibits:
2.1 Agreement and Plan of Merger, dated as of December 19, 2001, among
Murdock Communications Corporation, MCC Merger Sub Corporation and
Polar Molecular Corporation. (11)
2.2 Agreement regarding Effectiveness, dated as of December 19, 2001,
among Murdock Communications Corporation, MCC Merger Sub Corporation
and Polar Molecular Corporation. (11)
29
2.3 First Amendment to Agreement and Plan of Merger, dated as of August 1,
2002, among Murdock Communications Corporation, MCC Merger Sub
Corporation and Polar Molecular Corporation. (11)
2.4 Second Amendment to Agreement and Plan of Merger, dated as of November
26, 2002, among Murdock Communications Corporation, MCC Merger Sub
Corporation and Polar Molecular Corporation. (11)
2.5 Third Amendment to Agreement and Plan of Merger dated as of January
30, 2003, among Murdock Communications Corporation, MCC Merger Sub
Corporation and Polar Molecular Corporation. (11)
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 First Amendment to Restated Articles of Incorporation of the Company.
(2)
3.3 Second Amendment to Restated Articles of Incorporation of the Company.
(2)
3.4 Third Amendment to Restated Articles of Incorporation of Murdock
Communications Corporation. (11)
3.5 Amended and Restated By-Laws of the Company. (3)
4.1 Form of Common Stock Purchase Warrant Agreement between the Company
and Firstar Trust Company. (1)
4.2 Form of Redeemable Warrant. (1)
4.3 First Amendment to Common Stock Purchase Warrant Agreement, dated as
of September 30, 1999, between the Company and Firstar Trust Company.
(8)
4.4 Second Amendment to Common Stock Purchase Warrant Agreement, dated as
of April 14, 2000, between the Company and Firstar Bank, N.A. (11)
4.5 Third Amendment to Common Stock Purchase Warrant Agreement, dated as
of October 9, 2000, between the Company and Firstar Bank, N.A. (11)
4.6 Fourth Amendment to Common Stock Purchase Warrant Agreement, dated as
of October __, 2001, between Murdock Communications Corporation and
Firstar Bank, N.A. (11)
30
4.7 Fifth Amendment to Common Stock Purchase Warrant Agreement and Joinder
Agreement, dated as of October 18, 2002, between Murdock
Communications Corporation and Computershare Trust Company, Inc. (11)
10.1 Murdock Communications Corporation 1993 Stock Option Plan. (1) (5)
10.2 Murdock Communications Corporation 1997 Stock Option Plan, as amended.
(4) (5)
10.3 Employment Agreement, dated as of November 16, 1998, by and between
the Company and Paul C. Tunink. (4) (5)
10.4 Note and Warrant Purchase Agreement, dated as of June 21, 1999, by and
among the Company, Priority International Communications, Inc.,
Incomex, Inc., MCC Acquisition Corp., and New Valley Corporation. (6)
10.5 Stock Purchase Warrant dated June 21, 1999 from the Company to New
Valley Corporation. (6)
10.6 Registration Rights Agreement, dated as of June 21, 1999, between the
Company and New Valley Corporation. (6)
10.7 Amendment to Investment Agreement, dated as of June 21, 1999, among
ACTEL Integrated Communications, Inc., the Company, John Beck and
Richard Courtney. (7)
10.8 Letter Agreement dated December 22, 1999, between Murdock
Communications Corporation and Berthel Fisher & Company Financial
Services, Inc. (11)
10.9 Letter Agreement dated July 1, 2001, between Murdock Communications
Corporation and Berthel Fisher & Company Financial Services, Inc. (11)
10.10 Letter Agreement dated November 4, 2002 between Murdock
Communications Corporation and Berthel Fisher & Company Financial
Services, Inc. (11)
10.11 Waiver and First Amendment to Note and Warrant Purchase Agreement,
dated as of December 17, 1999, among the Company, Priority
International Communications, Inc., ATN Communications, Inc., Incomex,
Inc., MCC Acquisition Corp. and New Valley Corporation. (8)
10.12 Stockholders Agreement, dated as of April __, 2000, among Actel
Integrated Communications, Inc., the Company and the other
stockholders of Actel Integrated Communications, Inc. (9)
31
10.13 First Amendment to Stockholders Agreement and Consent to Permitted
Transferees, dated as of June 13, 2000, among Actel Integrated
Communications, Inc., the Company and the other stockholders of Actel
Integrated Communications, Inc. (9)
10.14 Form of Convertible Note of the Company due December 31, 2002 (9)
10.15 Purchase Agreement, dated as of June 23, 2000, among the Company, MCC
Acquisition Corp., John Rance, Michael Upshaw, Fernando Ficachi and
the other former shareholders of Incomex, Inc. (10)
10.16 Addendum to Employment Agreement for Paul C. Tunink (12)(5)
10.17 Stock Purchase Agreement, dated as of July 31, 2001, among Murdock
Communications Corporation, MCC Acquisition Corporation, Priority
International Communications, Inc. and Dartwood, LLC. (13)
10.18 Compromise, Settlement and Mutual Release Agreement, dated as of June
20, 2002, among Republic Credit Corporation I, Murdock Communications
Corporation and Silent Woman, L.L.C. (14)
10.19 Compromise, Settlement and Mutual Release Agreement, dated as of
August 1, 2002, between Murdock Communications Corporation and Buckeye
Retirement Co., L.L.C. (15)
10.20 Compensation Agreement, dated August 1, 2002, between Murdock
Communications Corporation and Pirinate Consulting Group, L.L.C. (15)
10.21 First Amendment to Compensation Agreement between Murdock and
Pirinate Consulting Group, L.L.C., dated January 3, 2003. (11)
10.22 Amendment, Modification and Extension Agreement, dated as of November
16, 2002, among Republic Credit Corporation I, Murdock Communications
Corporation and Silent Woman, L.L.C. (11)
10.23 Second Amendment, Modification and Extension Agreement, dated January
28, 2003, among Republic Credit Corporation I, Murdock Communications
Corporation and Silent Woman, L.L.C. (11)
10.24 Letter Agreement between Murdock and Dave Kirkpatrick for conversion
of service fees to equity, dated January 27, 2003. (11)
10.25 Letter Agreement between Murdock and Wayne Wright for conversion of
service fees to equity, dated January 27, 2003. (11)
32
10.26 Letter Agreement between Murdock and Berthel Fischer & Company for
settlement of outstanding fees, dated January 9, 2003. (11)
10.27 Letter Agreement between Murdock and MCC Investment Company re
outstanding debt, dated January 3, 2003. (11)
10.28 Mutual Settlement and Release Agreement, dated November 7, 2002,
among John S. Rance, Steven E. Rance, Robert M. Upshaw, Fernando
Ficachi and Berthel Fisher & Company, Thomas J. Berthel, Ronald O.
Brendergen, Eugene I. Davis, Thomas E. Chaplin, Guy O. Murdock, Steven
J. Ehlert and Murdock Communications Corporation and any and all of
its current and former directors, officers, agents and employees. (11)
21 Subsidiaries. (11)
24 Power of Attorney (included as part of the signature page hereof).
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, or adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, or adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
33
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333--5422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997 (File No. 000-21463) and incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997 (File No. 000-21463) and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998 (File No. 000-21463) and incorporated herein
by reference.
(5) Management contract or compensatory plan or arrangement.
(6) Filed as exhibit to the Company's registration statement on Form SB-2 (File
No. 333-78399) and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1999 (File No. 000-21463) and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999 (File No. 000-21463) and incorporated herein
by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 (File No. 000-21463) and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on August 30,
2000 and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Registration Statement on Form S-4
(File No. 333-103167) filed with the Securities and Exchange Commission on
February 13, 2003 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 000-21463) and incorporated herein
by reference.
34
(13) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on July 31,
2001 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (File No. 000-21463) and incorporated herein by
reference.
(15) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (File No. 000-21463) and incorporated
herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the fourth quarter of 2002.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
By /s/Eugene Davis
---------------------------------
Eugene Davis
Chief Executive Officer
Date: April 15, 2003
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Wayne Wright, his
true and lawful attorney-in-fact, with power to act with or without the other
and with full power of substitution and resubstitution, in any and all
capacities, to sign any or all amendments to the Form 10-K and file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Eugene Davis
- ------------------- Director and Chief Executive April 15, 2003
Eugene Davis Officer (Principal Executive Officer)
/s/ Guy O. Murdock
- ------------------- Director April 15, 2003
Guy O. Murdock
/s/ Wayne Wright
- ------------------- Director and Principal Accounting April 15, 2003
Wayne Wright Officer (Principal Financial and
Accounting Officer)
36
CERTIFICATIONS
I, Eugene I. Davis, Chief Executive Officer of Murdock Communications
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Murdock
Communications Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
37
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Eugene I. Davis
-------------------------------
Eugene I. Davis
Chief Executive Officer
(Principal Executive Officer)
38
I, Wayne Wright, Principal Accounting Officer of Murdock Communications
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Murdock
Communications Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
39
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 15, 2003
/s/ Wayne Wright
-------------------------------
Wayne Wright
Principal Accounting Officer
(Principal Financial Officer)
40
MURDOCK COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
- -------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity (Deficiency) . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . F-11
SCHEDULE - Valuation and Qualifying Accounts . . . . . . . . . . . F-31
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Murdock Communications Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses, negative
working capital, and shareholders' deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
March 7, 2003
F-2
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 3
Accounts receivable, less allowances for doubtful
accounts: 2002 - $179; 2001 - $179. . . . . . . . . . . . . . . . . . . . . 2 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 5 11
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 8 14
-------- --------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
-------- --------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 $ 15
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable with related parties (Note 5). . . . . . . . . . . . . . . . . $ 7,186 $ 2,721
Notes payable, others (Note 5) . . . . . . . . . . . . . . . . . . . . . . . 6,614 6,045
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960 614
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,272 5,036
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 489
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 22,468 14,905
LONG-TERM LIABILITIES:
Long-term debt with related parties (Note 5) . . . . . . . . . . . . . . . . - 4,063
Long-term debt, others (Note 5). . . . . . . . . . . . . . . . . . . . . . . - 569
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 22,468 19,537
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, no par or stated value (Note 8):
Authorized - 40,000,000 shares
Issued and outstanding: 2002 - 12,554,967 shares; 2001 - 12,514,967 shares. 22,291 22,287
Common stock warrants (Note 7):
Issued and outstanding: 2002 - 10,889,478; 2001 - 10,875,312. . . . . . . . 1,052 1,052
Treasury stock at cost: 2002 and 2001 - 250,000 shares . . . . . . . . . . . . (94) (94)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45,842) (42,901)
--------- ---------
Total shareholders' deficiency . . . . . . . . . . . . . . . . . . . (22,459) (19,522)
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 $ 15
========= =========
See notes to consolidated financial statements.
F-3
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------
2002 2001 2000
CONTINUING OPERATIONS:
REVENUES:
Call processing . . . . . . . . . . . . . . . . . $ - $ 19 $ 135
Other revenue . . . . . . . . . . . . . . . . . . - 3 56
-------- -------- --------
Total revenues . . . . . . . . . . . . . - 22 191
-------- -------- --------
COST OF SALES:
Call processing . . . . . . . . . . . . . . . . . - - 330
Other cost of sales . . . . . . . . . . . . . . . - - 5
-------- -------- --------
Total cost of sales. . . . . . . . . . . - - 335
-------- -------- --------
GROSS PROFIT (LOSS) . . . . . . . . . . . . . . . . - 22 (144)
-------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative expense . . . 709 742 575
Depreciation and amortization expense . . . . . . - 6 36
Impairment of assets (Note 4) . . . . . . . . . . - - 1,682
AcNet bad debt and acquisition expenses (Note 4). - - 990
-------- -------- --------
Total operating expenses . . . . . . . . 709 748 3,283
-------- -------- --------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . (709) (726) (3,427)
-------- -------- --------
NONOPERATING INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . (2,235) (2,304) (3,431)
Other income (expense) (Note 6) . . . . . . . . . 3 (3) 7,001
-------- -------- --------
Total nonoperating income (expense). . . (2,232) (2,307) 3,570
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . (2,941) (3,033) 143
INCOME TAX BENEFIT (Note 9) . . . . . . . . . . . . - - 9
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . (2,941) (3,033) 152
-------- -------- --------
DISCONTINUED OPERATIONS (Note 3):
Loss from operations. . . . . . . . . . . . . . . - (95) (4,844)
Gain (loss) on disposition. . . . . . . . . . . . - 1,314 (332)
-------- -------- --------
Total discontinued operations. . . . . . - 1,219 (5,176)
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . (2,941) (1,814) (5,024)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF
DEBT (Note 5) . . . . . . . . . . . . . . . . . . - - 722
-------- -------- --------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . (2,941) (1,814) (4,302)
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE
PREFERRED STOCK . . . . . . . . . . . . . . . . . - - (125)
-------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. . . . $(2,941) $(1,814) $(4,427)
======== ======== ========
(Continued)
F-4
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (CONCLUDED)
- ----------------------------------------------------------
2002 2001 2000
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Income (loss) from continuing operations. . . . . . $ (0.24) $ (0.25) $ -
Income (loss) from discontinued operations. . . . . - 0.10 (0.48)
------------ ------------ ------------
Loss before extraordinary item. . . . . . . . . . . (0.24) (0.15) (0.48)
Extraordinary item - gain on extinguishment of debt - - 0.07
------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.24) $ (0.15) $ (0.41)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . . . . 12,281,732 12,264,967 10,869,511
============ ============ ============
See notes to consolidated financial statements.
F-5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLAR AND SHARE DATA IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS TREASURY STOCK
--------------- --------------- ------------------ ----------------
NUMBER NUMBER NUMBER NUMBER
OF OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED SHARES ISSUED
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . 19 $ 1,868 10,576 $20,259 5,867 $ 635 - $ -
Issuance of warrants in connection with
termination of employment agreements . . . . . - - - - 150 - - -
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . . - - - - 5,199 472 - -
Canellation of warrants. . . . . . . . . . . . . - - - - (495) (99) - -
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - 19 35 (25) (1) - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - 23 - - - - - -
Conversion of preferred stock into common stock. (19) (1,891) 1,684 1,891 - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - - 236 102 - - - -
Treasury stock acquired - Incomex sale . . . . . - - - - - - 250 (94)
Net loss for 2000. . . . . . . . . . . . . . . . - - - - - - - -
------- -------- ------ ------- --------- -------- ------ --------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . - $ - 12,515 $22,287 10,696 $ 1,007 250 $ (94)
======= ======== ====== ======= ========= ======== ====== ========
(Continued)
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . $ 134 $ (36,660) $ (13,764)
Issuance of warrants in connection with
termination of employment agreements . . . . . - - -
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . . - - 472
Cancellation of warrants . . . . . . . . . . . . - - (99)
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - 34
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - (23) -
Conversion of preferred stock into common stock. - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - (102) -
Treasury stock acquired -Incomex sale. . . . . . - - (94)
Net loss for 2000. . . . . . . . . . . . . . . . - (4,302) (4,302)
---------- ----------- -------------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . $ 134 $ (41,087) $ (17,753)
========== =========== =============
(Continued)
F-6
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONCLUDED) (DOLLAR AND SHARE DATA IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
----------------------- --------------------------- --------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
BALANCES AT JANUARY 1, 2001 . . . . . . . . . . - $ - 12,515 $ 22,287 10,696 $ 1,007
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - - - - 179 45
Net loss for 2001 . . . . . . . . . . . . . . - - - - - -
------------ --------- -------------- ----------- ----------- -------
BALANCES AT DECEMBER 31, 2001 . . . . . . . . . - - 12,515 22,287 10,875 1,052
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - - - - 14 -
Issuance of common stock for the
extinguishment of an accrued
expense . . . . . . . . . . . . . . . . . . . - - 40 4 - -
Net loss for 2002 . . . . . . . . . . . . . . - - - - - -
------------ --------- -------------- ----------- ----------- -------
BALANCES AT DECEMBER 31, 2002 . . . . . . . . . - $ - 12,555 $ 22,291 10,889 $ 1,052
============ ========= ============== =========== =========== =======
See notes to consolidated financial statements.
TREASURY STOCK SHARE-
NUMBER ADDITIONAL HOLDERS'
OF PAID-IN ACCUMULATED EQUITY
SHARES ISSUED CAPITAL DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 2001 . . . . . . . . . . 250 $ (94) $ 134 $ (41,087) $ (17,753)
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - - - - 45
Net loss for 2001 . . . . . . . . . . . . . . - - - (1,814) (1,814)
------ --------- ---------- ------------- -----------
BALANCES AT DECEMBER 31, 2001 . . . . . . . . . 250 (94) 134 (42,901) (19,522)
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - - - - -
Issuance of common stock for the
extinguishment of an accrued
expense . . . . . . . . . . . . . . . . . . . - - - - 4
Net loss for 2002 . . . . . . . . . . . . . . - - - (2,941) (2,941)
------ --------- ---------- ------------- -----------
BALANCES AT DECEMBER 31, 2002 . . . . . . . . . 250 $ (94) $ 134 $ (45,842) $ (22,459)
====== ========= ========== ============= ===========
See notes to consolidated financial statements.
F-7
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(2,941) $(1,814) $(4,302)
Adjustments to reconcile net loss to net cash flows
from operating activities of continuing operations:
Impairment of assets . . . . . . . . . . . . . . . . . - - 1,682
AcNet bad debt and acquisition expenses. . . . . . . . - - 990
Depreciation and amortization. . . . . . . . . . . . . - 64 719
Gain on sale of property and equipment . . . . . . . . - - (102)
Noncash interest expense . . . . . . . . . . . . . . . - 45 464
Gain on debt restructuring plan. . . . . . . . . . . . - - (6,946)
Loss on discontinued operations. . . . . . . . . . . . - 95 4,844
(Gain) loss on disposition of discontinued operations. - (1,314) 332
Extraordinary gain on extinguishment of debt . . . . . - - (722)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . (2) - 490
Other current assets . . . . . . . . . . . . . . . . 6 34 139
Other noncurrent assets. . . . . . . . . . . . . . . - - 11
Outstanding checks in excess of available balances . - - (10)
Accounts payable and accrued expenses. . . . . . . . 2,533 2,421 1,016
Other liabilities. . . . . . . . . . . . . . . . . . - - (22)
-------- -------- --------
Net cash flows from operating activities of
continuing operations. . . . . . . . . . . . (404) (469) (1,417)
Net cash flows from discontinued operations . . - 148 (357)
-------- -------- --------
Net cash flows from operating activities. . . . (404) (321) (1,774)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments. . . . . . . . . . . . - - 4,948
Proceeds from sale of subsidiary . . . . . . . . . . . . - 100 -
Proceeds from sale of property and equipment . . . . . . - - 489
Payments received on note receivable . . . . . . . . . . - - 500
-------- -------- --------
Net cash flows from investing activities. . . . - 100 5,937
-------- -------- --------
(Continued)
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation with a related party. . . . . . . - (1) (472)
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . 402 158 656
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . - (100) (2,772)
Payments on long-term debt with related parties. . . . . . . . . . . . - - (429)
Payments on long-term debt, others . . . . . . . . . . . . . . . . . . - - (1,042)
------ ------ --------
Net cash flows from financing activities. . . . . . . . . . . 402 57 (4,059)
------ ------ --------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . (2) (164) 104
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . 3 167 63
------ ------ --------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 3 $ 167
====== ====== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $ - $ - $ 853
Cash paid during the year for income taxes . . . . . . . . . . . . . . - - 6
See notes to consolidated financial statements.
F-9
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONCLUDED)
- ----------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 2002 NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company issued 40,000 shares of common stock in exchange for the
extinguishment of an accrued expense.
SUPPLEMENTAL DISCLOSURES OF 2001 NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the sale of the Priority International Communications, Inc.
subsidiary, the Company received a note receivable for $96,000 and assigned it
to MCC Investment Company, LLC to repay outstanding debt and accrued interest.
During the year the Company issued 179,600 common stock warrants and recorded a
$45,000 increase to common stock warrants and deferred financing costs which
costs were recorded as interest expense due to the past due status of the
underlying debt.
SUPPLEMENTAL DISCLOSURES OF 2000 NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company recorded an increase to the carrying value of the Company's 8%
Series A Convertible Preferred Stock and a charge to accumulated deficit of
$23,000 representing the current period accretion to its conversion price of
$1,891,000. These shares were converted into 1,683,880 shares of common stock.
During the year, common stock warrants were exercised by individuals, increasing
common stock by $35,000 (18,941 shares) in a cashless exercise through the
exchange of debt.
The Company issued stock dividends of $102,000 representing 236,129 shares of
common stock recorded as an increase to common stock and an increase in
accumulated deficit.
The Company recorded $94,000 representing treasury stock received in the
cashless sale of the Incomex subsidiary, representing 250,000 shares of common
stock, and the net assets of the Company decreased by $1,648,000 related to the
sale.
During the year the Company issued 5,199,121 common stock warrants and recorded
a $472,000 increase to common stock warrants and deferred financing costs.
The Company transferred 1,063,584 shares of Actel Integrated Communications,
Inc. Preferred Stock, reducing the cost basis of the investment by $729,910, and
$4,600,000 of new notes payable were issued in connection with the transaction
in exchange for the cancellation of approximately $9,200,000 of outstanding
indebtedness related to the Debt Refinancing Plan.
In December of 2000, the Company cancelled warrants with a recorded value of
$99,000.
See notes to consolidated financial statements.
F-10
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Murdock Communications Corporation (individually, or
collectively with its wholly-owned subsidiaries discussed below, referred to
herein as the "Company") had been engaged in recent years in the business of
providing operator services and call processing to North American payphones,
hotels and institutions, database profit management services and
telecommunications billing and collection services for the hospitality industry
and outsourced operator services for the telecommunications industry. The
Company operated its business under three business units prior to the sales
discussed below. At December 31, 2002 and 2001 the Company had no operating
activities and no reportable segments. The Company continues to exist as a
public shell for use as a reverse merger vehicle.
MTS - Murdock Technology Services ("MTS") was created in 1998 to meet the needs
of the hospitality telecommunications management market by providing database
profit management services and other value added telecommunication services.
The division's main product, the MCC Telemanager (TM), was a proprietary
software and hardware product, created to help manage telecommunication
installations and services in the hospitality market.
In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the lease of MCC Telemanager (TM) technology by
Telemanager.net in exchange for monthly rental payments to the Company. On
December 20, 2000, the Company sold all the primary assets which were subject to
the Rental Agreement to Telemanager.net. Telemanger.net is owned by former
executives of the Company.
Incomex - On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"),
the Company's second business unit. Incomex was primarily engaged in the
business of providing billing and collection services to the hospitality
industry from Mexico to the United States. The Company sold 100% of the stock
of Incomex to three of the former shareholders of Incomex with an effective
closing date of June 30, 2000 (see Note 3).
PIC - On October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC"). PIC was primarily engaged in the business of
providing long-distance telecommunications services to patrons of hotels, public
and private payphone owners and aggregators of operator service traffic with
which PIC had contracts to provide such services. Services included, but were
not limited to, credit card billing services, live operator services, automated
collection and messaging delivery services, voice mail services and
telecommunications consulting.
Also, on October 31, 1997, the Company purchased PIC Resources Corp. ("PIC-R").
PIC-R, operating through its wholly-owned subsidiary ATN Communications,
Incorporated ("ATN") was merged into PIC in January 1999. ATN was primarily
engaged in the business of providing carrier services for long-distance
telecommunications companies throughout the United States. ATN handled incoming
operator assisted calls with their operators on location. Unless otherwise
indicated, references in this report to "PIC" include the historical operations
of ATN.
Effective July 31, 2001 the Company sold 100% of the stock of PIC to a third
party who is related to a director, executive officer and shareholder of the
Company (see Note 3).
F-11
BASIS OF PRESENTATION - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has an accumulated deficit of $45.8 million and current liabilities
exceed current assets by $22.5 million at December 31, 2002. The Company also
is past due in the payment of approximately $14.6 million in principal and
accrued interest payable. If the creditors who hold the past due debt seek to
enforce their payment rights, the Company would not be able to repay the debt.
These factors, among others, indicate that the Company may be unable to continue
as a going concern for a reasonable period of time. Management's plans are
discussed below.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing and
refinancing as may be required. Management's plans to accomplish these
objectives include, but are not limited to, the following:
- - The Company intends to continue to negotiate with its creditors to
restructure indebtedness and obtain financing to fund operations. The
Company believes that possible sources of funds will primarily consist of
advances from Polar Molecular Corporation ("Polar"). If the Company is
unsuccessful in this strategy, the Company may not be able to continue
operating as a going concern.
- - The Company has an agreement with Polar to use the Company's public shell
as a reverse merger vehicle. On December 19, 2001 the Company and Polar
entered into an Agreement and Plan of Merger (see Note 2). The merger is
subject to a number of significant closing conditions, including, among
others, approval by the shareholders of the parties, that shareholders
owning no more than 1,000 shares of the Company's or Polar's common stock
shall have exercised dissenters' or appraisal rights with respect to the
merger, the conversion of substantially all of the Company's indebtedness
into equity, and completion of the merger by May 15, 2003. If the merger is
not completed for any reason, the Company will continue to be subject to a
significant amount of past due debt and other liabilities, including the
costs related to the proposed merger, without any source of operating cash
flow to satisfy its liabilities. The Company also would not be able to
continue to borrow from Polar, which has been the Company's principal
source of cash since the beginning of 2002. The Company can make no
assurance that it would be able to identify another merger transaction if
the merger is not completed, and in such event, the Company would not be
able to continue as a going concern.
- - The Company retains an investment banker, Berthel Fisher & Company
Financial Services, Inc. ("Berthel"), to assist the Company regarding the
identification and investigation of strategic alternatives available to the
Company. Berthel, including entities related to Berthel, is a significant
shareholder of the Company.
DISCONTINUED OPERATIONS - The accompanying statements of operations have been
reclassified for the dispositions of the Incomex subsidiary (see Note 3) and the
PIC subsidiary (see Note 3) so that the results for each subsidiary's operations
are classified as discontinued operations for all periods presented. The
statements of cash flows and related notes to the consolidated financial
statements have also been reclassified to conform to the discontinued operations
presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements included the
accounts of the Company and the accounts of its wholly-owned subsidiaries, PIC
and Incomex (prior to their sale). Significant intercompany accounts and
transactions have been eliminated in consolidation.
F-12
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates.
REVENUE RECOGNITION - Revenue was recognized as calls were placed and processed.
Revenue recognized on the sale of hardware occurred at the time of delivery and
revenues for other services was recognized at the time the services were
rendered.
FURNITURE AND EQUIPMENT - Furniture and equipment were stated at cost. For
financial reporting purposes, depreciation and amortization were computed on
these assets using the straight-line method over their estimated useful lives of
five years. For income tax purposes, accelerated methods were used. Furniture
and equipment were fully depreciated and written off in 2001.
INTANGIBLE ASSETS - Intangible assets relate to deferred financing and lease and
loan restructuring costs. Financing and lease and loan restructuring costs
incurred were deferred and were amortized over the new or restructured lease and
loan agreement terms using the effective interest method. All amounts were
fully amortized at December 31, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviewed long-lived assets for
impairment whenever events or changes in circumstances indicated the carrying
amount of these assets may not be recoverable. See Note 3 for impairments
recorded in 2000.
INVESTMENTS - The Company owned convertible preferred stock of Actel Integrated
Communications, Inc. ("Actel") which was not readily marketable. This
investment was accounted for at cost. This investment experienced a decline in
value that was other than temporary in 2000 due to Actel filing for bankruptcy
in April 2001. The Company recorded an impairment loss of $1.6 million in 2000
which was equal to the stock's cost basis at December 31, 2000.
INCOME TAXES - Deferred income taxes are provided for the tax consequences in
future years of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts, based on enacted tax laws and
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income tax
expense is the tax payable for the year and the change during the period in
deferred tax assets and liabilities.
ACCRETION ON PREFERRED STOCK - Up to September 30, 2000, the date of conversion,
the Company accreted the carrying value of the 8% Series A Convertible Preferred
Stock (net of offering costs incurred) to the conversion price by the effective
interest method.
CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Up to September 30, 2000, the date of
conversion, cumulative dividends on the Company's 8% Series A Convertible
Preferred Stock were recorded as a charge to accumulated deficit as the
dividends were earned by the holders and an accrued liability was recorded.
STOCK-BASED COMPENSATION - At December 31, 2002 the Company has two stock-based
employee compensation plans which are more fully described in Note 8. As
permitted by Statement of Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company measures compensation using
the intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but is required to
make pro forma disclosures in the footnotes to the financial statements as if
the measurement provisions of SFAS 123 and SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure - an Amendment of SFAS 123"
had been adopted. Under the intrinsic value method, compensation is measured as
the difference between the market value of the stock on the grant date, less the
amount required to be paid for the stock. The difference, if any, is charged to
expense over the vesting period of the options. No compensation expense was
F-13
recorded in connection with the grant of options for the years ended December
31, 2002, 2001 and 2000, respectively, as all options granted under the plans
had an exercise price greater than or equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
2002 2001 2000
Net loss attributable to As reported $(2,941) $(1,814) $(4,427)
common shareholders Pro forma (2,941) (1,837) (4,731)
Net loss per common share As reported $ (0.24) $ (0.15) $ (0.41)
Pro forma (0.24) (0.15) (0.44)
The weighted average fair values at date of grant for options granted during
2000 were estimated to be $45,000. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions: ten year expected life; stock volatility of 221% in 2000; risk-free
interest rate of 5.2% in 2000; and no dividends during the expected term. No
options were granted during 2002 or 2001 and the pro forma amounts reflect
options vesting during the year.
NET LOSS PER COMMON SHARE - Basic net loss per common share has been computed
using the weighted average number of shares of common stock outstanding during
the year. The warrants outstanding are anti-dilutive and are, therefore,
excluded from the computation of loss per share. In the future, the warrants
may become dilutive. Potential common shares excluded from the per share
computation because they were antidilutive are as follows:
YEARS ENDED DECEMBER 31,
2002 2001 2000
Options. . . . . . . . . - - -
Warrants . . . . . . . . 73,484 45,454 -
------ ------ ----
Total. . . . . . . . . . 73,484 45,454 -
====== ====== ====
The exercise prices on all outstanding options and warrants exceed the market
price of the Company's common stock at December 31, 2002, 2001 and 2000, except
as noted above.
RECLASSIFICATIONS - Certain amounts in the 2001 and 2000 consolidated financial
statements have been reclassified to conform with the 2002 presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In April 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Accounting Standard No.
145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This statement, among other
things, significantly limits the situations whereby the extinguishment of debt
is treated as an extraordinary item in the statement of operations. This
statement requires reclassification of all prior period extraordinary items
related to debt extinguishments. The provisions of this statement are effective
for fiscal years beginning after May 15, 2002.
F-14
2. PROPOSED MERGER WITH POLAR
On December 19, 2001 the Company and Polar entered into an Agreement and Plan of
Merger (as amended, the "Agreement"). Under the terms of the Agreement, the
outstanding shares of Polar's common stock will be converted into the number of
shares of the Company's no par value common stock (the "Common Stock") equal to
80% of the outstanding shares of the Common Stock as of the effectiveness of the
merger and the Company's shareholders will retain a 20% ownership. The
outstanding warrants and options of the Company will remain outstanding after
the completion of the merger and the outstanding warrants and options of Polar
will be converted into warrants and options to purchase Common Stock based on
the exchange ratio in the merger.
Polar develops and markets fuel additives. Polar's primary product, DurAlt(R)FC,
is a patented fuel additive that has been proven effective at reducing
combustion chamber deposits and reducing octane requirement increase in
combustion engines. Polar had a stockholders' deficit of $4.2 million
(unaudited) at September 30, 2002 and revenues for its fiscal year ended March
31, 2002 were $162,000 (unaudited).
One of the conditions to completing the merger is that the Company must cause
its creditors to forgive and/or convert into equity sufficient liabilities such
that the Company's liabilities, excluding loans from Polar and professional fees
directly related to the merger, do not exceed its assets at the time of the
merger. As of December 31, 2002, the Company's liabilities exceeded its assets
by approximately $21.9 million, excluding loans from Polar and professional fees
directly related to the merger. As of December 31, 2002, the Company has reached
agreements with the holders of the Company's debt or other obligations in the
aggregate amount of approximately $21.0 million for the satisfaction of such
liabilities in exchange for approximately 4,570,000 shares of the Company's
common stock and the payment by the Company of approximately $570,000 in cash.
However, as of March 7, 2003 the Company is in default on the terms of one of
these settlement agreements for $11.2 million requiring a cash payment of
$485,000. Also see Note 16. All of the agreements are contingent on the closing
of the merger and/or the cash payment.
To satisfy the above mentioned closing condition, the Company must reach
additional agreements with its creditors. Any conversions of liabilities to
equity will dilute the outstanding common stock held by the current
shareholders. The Company also must raise sufficient funds to make all of the
payments that may be required under the agreements with the Company's creditors,
and there can be no assurance that such funds will be available from Polar or
otherwise. If the Company is not able to satisfy the net worth test, Polar will
have the right to terminate the merger agreement.
The Company filed an S-4 Registration Statement with the Securities and Exchange
Commission in February 2003 in connection with the proposed merger.
3. DISCONTINUED OPERATIONS
Effective June 30, 2000 the Company sold all the shares of Incomex to three of
the former shareholders of Incomex for (a) the transfer to the Company by the
purchasers of 250,000 shares of the Company's common stock originally issued by
the Company pursuant to the Company's acquisition of Incomex, (b) cancellation
and forgiveness of all amounts outstanding under promissory notes in the
aggregate principal amount of $684,919, and related accrued interest, originally
issued by the Company to the shareholders of Incomex, and (c) the cancellation
of all employment compensation and employment contracts between the Company and
the purchasers. The parties also executed mutual releases relating to
liabilities between the Company and Incomex and claims that the Company may have
against the former shareholders of Incomex.
F-15
Summary operating results of the discontinued operations of Incomex are as
follows for the year ended December 31, 2000 (amounts expressed in thousands):
2000
Revenues. . . . . . . . . . . . . $ 2,987
Expenses. . . . . . . . . . . . . (4,162)
--------
Loss from discontinued operations $(1,175)
========
The loss from discontinued operations includes goodwill and fixed asset
impairment charges of approximately $4.3 million for 2000.
Effective July 31, 2001, the Company sold all the shares of PIC to Dartwood, LLC
for a total purchase price of $196,000, comprised of $100,000 cash and a
noninterest bearing promissory note of $96,000 payable in 24 monthly
installments of $4,000. A director, executive officer and significant
shareholder of the Company is related to the owner of Dartwood, LLC.
Summary operating results of the discontinued operations for PIC are as follows
for the years ended December 31, 2001 and 2000 (amounts expressed in thousands):
2001 2000
Revenues. . . . . . . . . . . . . $2,438 $ 8,246
Expenses. . . . . . . . . . . . . 2,533 11,915
------- --------
Loss from discontinued operations $ (95) $(3,669)
======= ========
The loss from discontinued operations includes charges (credits) related to the
following items for the year ended December 31, 2000 (amounts expressed in
thousands):
2000
Goodwill impairment . . . . . . . . . . $3,300
USF fees. . . . . . . . . . . . . . . . (894)
Telecommunications equipment impairment 600
-------
Total . . . . . . . . . . . . . . . . . $3,006
=======
In December 1999, ATN received notice from the Universal Service Administrative
Company ("USAC") that Universal Service Fund ("USF") fees were due. A carrier
of interstate/intrastate calls is required to pay a USF fee based on a
percentage of total call revenue. The USF fee is applicable to all calls
carried after January 1, 1997. The notice was the first time that management
became aware of any liability to this agency. It was management's belief that
these USF fees had been charged to the end-user and remitted to USAC by its
prior billing and collection firm. The prior billing and collection firm's
position was that they had collected the USF fees and remitted them to ATN. As
ATN is legally responsible for USF fees, in December 1999 it recorded an
estimated liability of $1.7 million. During the first two months of 2001, ATN
received credit memos from USAC which reflected a balance due to USAC of
$806,000. Accordingly, ATN recorded a $894,000 credit for USF fees in the
fourth quarter of 2000 based on the new information from USAC. The Company
reached a settlement agreement with the prior billing and collection firm on
January 25, 2001, which released the firm from any claims that ATN may have
related to USF fees. Any liability related to USF fees was transferred to the
purchaser of PIC.
F-16
4. INVESTMENTS
During 1998, the Company reached an agreement to invest in Actel. Actel, based
in Mobile, Alabama, was a facilities-based competitive local exchange carrier of
advanced voice and data communications services to small and medium sized
enterprises. As of June 21, 1999 the Company had invested $3.0 million in
Actel. Effective June 21, 1999, the Company and Actel entered into an agreement
to amend the terms of the original investment agreement with respect to the
Company's investment in Actel. This agreement amended certain provisions of the
investment agreement including limiting the Company's investment in Actel to
$3.0 million. During the third quarter of 1999, the $3.0 million investment was
converted into 4,371,428 shares of Actel's Series A Convertible Preferred Stock
as allowed by the investment agreement. Each share of Series A Convertible
Preferred Stock accrued a cumulative 10% dividend per annum through March 10,
2002 and was convertible into 3 shares of Actel's common stock at any time at
the option of the Company, subject to certain restrictions. The share and
conversion information have been retroactively restated for a stock split of the
Series A Convertible Preferred Stock and common stock by Actel during 2000.
During the second quarter of 2000, the Company undertook a Debt Restructuring
Plan which resulted in the Company selling or exchanging 2,213,198 shares of
Actel Series A Convertible Preferred Stock in private placements. Following
these transactions, the Company held 2,158,230 shares of Actel Series A
Convertible Preferred Stock.
During late 2000, Actel began experiencing cash flow difficulties and on April
11, 2001, Actel filed for bankruptcy protection under Chapter 11. On September
14, 2001 the bankruptcy proceeding was converted to Chapter 7. The Company
recorded an impairment charge of approximately $1.6 million in 2000, due to the
uncertainty of ultimate recovery of the investment.
During 1998, the Company reached an initial lending/investment agreement with
AcNet S.A. de C.V. of Mexico ("AcNet Mexico"). The initial agreement was revised
in June 1999, whereby the Company entered into two agreements providing the
Company with separate options to acquire (i) Intercarrier Transport Corporation
("ITC"), the holder of approximately 99% of the outstanding shares of AcNet
Mexico, and (ii) AcNet USA, Inc. ("AcNet USA"), an affiliate of AcNet Mexico,
for an aggregate of 2,325,000 shares of the Company's common stock, $200,000 in
closing costs and an additional $550,000 to pay off certain debt and accounts
payable. The option with ITC expired on August 31, 2001 and the option with
AcNet USA expired on December 31, 1999. As of December 31, 2000, the Company
had loaned $3.7 million to the AcNet entities, recorded $264,000 of interest and
incurred $729,000 of costs either related to the acquisition or paid on behalf
of the AcNet entities.
In light of the Company's liquidity issues and other issues involving the AcNet
entities, the Company did not pursue the options to acquire the AcNet entities.
As a result and due to cash flow difficulties being experienced by the AcNet
entities, the Company recorded asset write-downs of $3,703,000 in 1999 and
$990,000 in the second quarter of 2000 due to the write-off of costs associated
with the proposed acquisition and the uncertainty of ultimate recovery of the
investment. The Company commenced legal action against the AcNet entities in
April 2000 to collect its advances and interest. On March 29, 2001, AcNet USA
filed for bankruptcy protection and the Company has been informed that AcNet
Mexico is in receivership.
On May 31, 2001, the AcNet entities filed a motion with the Iowa state court
seeking permission to untimely file a counter-claim against the Company, and
asked for damages against the Company of approximately $20 million plus punitive
damages. The AcNet entities alleged the Company breached an oral agreement,
committed fraudulent misrepresentation, and the AcNet entities also filed counts
for common counts, action for account stated, and negligent misrepresentation.
On September 6, 2001, the Company entered into a Compromise Settlement Agreement
and Full and Final Release with the AcNet entities. Under the terms of the
Agreement, the AcNet entities paid a nominal consideration to the Company and
both parties exchanged releases on all claims against the other party.
F-17
5. NOTES PAYABLE
Notes payable as of December 31, 2002 and 2001, consisted of the following:
(DOLLARS IN THOUSANDS)
----------------------
2002 2001
Past due notes payable to individuals, $200,000 of which has
been provided by related parties, bearing interest at
the default rate of 18%, due March 5, 1999. Warrants
to purchase 300,000 shares of the Company's common
stock were issued, 200,000 of which were issued to related
parties, at an exercise price of $1.44 per share which expire,
if unexercised, on March 31, 2004.. . . . . . . . . . . . . . . . . . $ 300 $ 300
Past due notes payable to individuals, $25,000 of which has
been provided by related parties, bearing interest at the
default rate of 18%, due March 31, 1999. Warrants to
purchase 275,000 shares of the Company's common
stock were issued, 25,000 of which were issued to related
parties, at an exercise price of $1.75 per share which
expire, if unexercised, on March 31, 2004.. . . . . . . . . . . . . . 275 275
Past due notes payable to individuals, $1,725,000 of which has
been provided by related parties, bearing interest at the default
rate of 18%, due November 30, 1999. Warrants to purchase
984,000 shares of the Company's common stock were
issued, 230,000 of which were issued to related parties.
The warrants were issued at exercise prices ranging
from $2.50 to $3.53 and, if unexercised, expire on
dates ranging from November 2003 to December 2003.. . . . . . . . . . 6,895 6,895
Past due note payable to consultant bearing interest at the default
rate of 18%, due March 31, 1999. Warrants to purchase 25,000
shares of the Company's common stock were issued at an
exercise price of $1.75 per share which expire, if
unexercised, on March 31, 2004. . . . . . . . . . . . . . . . . . . . 25 25
Past due note payable to an individual, bearing interest at the default
rate of 18%, due May 19, 2001.. . . . . . . . . . . . . . . . . . . . 500 500
F-18
(DOLLARS IN THOUSANDS)
----------------------
2002 2001
Past due note payable to Murdock Communications Corporation
Investment Company ("MCCIC") bearing interest at 12%,
due June 21, 2001. Warrants to purchase 4,289,897 shares
of the Company's common stock were issued at a weighted
average exercise price of $2.00 per share which, if unexercised,
expire between December 2004 and April 2005. The note is
collateralized by substantially all assets of the Company (see
additional terms below). . . . . . . . . . . . . . . . . . . . . . . . . 388 388
Past due revolving promissory note payable to MCCIC bearing
interest at 12%, due June 21, 2001. In 2002 warrants to purchase
14,166 shares of the Company's common stock were issued at
a weighted average exercise price of $.14 per share which, if
unexercised, expire between January 2007 and March 2007.
In 2001 warrants to purchase 179,600 shares of the Company's
common stock were issued at a weighted average exercise price of
$.13 per share which, if unexercised, expire between August 2006
and December 2006. In 2000 warrants to purchase 909,224 shares of
the Company's common stock were issued at a weighted average
exercise price of $1.94 per share which, if unexercised, expire
between December 2004 and April 2005. The note is collateralized
by substantially all assets of the Company (see additional terms
below).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 183
Past due notes payable to various Berthel entities, bearing interest
at 12% due June 21, 2001.. . . . . . . . . . . . . . . . . . . . . . . . 200 200
Uncollateralized covertible notes payable to individuals, bearing
interest at 12% due May 29, 2003 (see Note 6 for conversion terms).
Warrants to purchase 978,724 shares of the Company's common
stock were issued at an exercise price of $1.75 per share which,
if unexercised, expire March 31, 2004. . . . . . . . . . . . . . . . . . 569 569
Uncollateralized convertible notes payable to related party individuals,
bearing interest at 12% due May 29, 2003 (see Note 6 for
conversion terms). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,142 1,142
Uncollateralized convertible notes payable to Berthel, bearing interest
at 12% due May 29, 2003 (see Note 6 for conversion terms). . . . . . . . 2,921 2,921
Uncollateralized one year notes payable to Polar, bearing interest at 10%. 395 -
--------- --------
Total notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800 13,398
Past due or current portion of notes payable . . . . . . . . . . . . . . . (13,800) (8,766)
--------- --------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 4,632
========= ========
F-19
On June 17, 1999, the Company completed a bridge financing in the amount of $2.0
million with New Valley Corporation ("New Valley"). Pursuant to the bridge
financing, the Company issued a note in the principal amount of $2.0 million
(the "Note"). This principal and all unpaid accrued interest at 12% per annum
were due July 21, 1999. The Company was past due on this note effective July
21, 1999. Warrants to purchase 250,000 shares of the Company's common stock
were issued in connection with the Note at an exercise price of $3.50 per share
and may be exercised at anytime through June 21, 2009. Because the Company did
not repay the Note on or prior to September 21, 1999, the warrants may be
exercised to purchase a total of 500,000 shares of the Company's common stock.
On December 17, 1999, the Company amended the terms of the agreement with New
Valley. The amendment reset the interest rate to 12% since inception (14% upon
default) and the note was due in 5 monthly payments of $200,000 beginning
January 17, 2000 with a final payment of $1.0 million on June 17, 2000. Waivers
of any prior violations were included as part of the amendment. The Note was
convertible into shares of common stock of the Company at the option of New
Valley at any time up to the maturity date. The number of shares in the
conversion was to be obtained by dividing the principal amount of the Note
converted by the conversion price of $3.00.
The January, February and March 2000 payments under the Note were paid on behalf
of the Company by MCCIC, a company owned by Berthel and another significant
shareholder of the Company. On April 6, 2000, the entire interest of New Valley
in this loan was purchased by MCCIC. The terms of the note and warrant purchase
agreement with MCCIC, bearing interest at 12%, was amended on June 22, 2000 with
payment of all remaining principal and interest due on June 21, 2001.
During 2000, the Company also entered into a Revolving Promissory Note with
MCCIC, bearing interest at 12% with payment of all remaining principal and all
accrued interest due on June 21, 2001.
The Company reached a Compromise Settlement Agreement and Mutual Release with
the FDIC on October 19, 2000 to pay $300,000 in settlement of two notes payable
with a financial institution with combined principal of $900,000. As a result,
the Company recorded a $722,000 extraordinary gain on extinguishment of debt,
including interest, in the fourth quarter of 2000 when the settlement was paid.
6. DEBT RESTRUCTURING PLAN
During the second quarter of 2000, the Company undertook a plan ("the Debt
Restructuring Plan") designed to restructure a significant portion of the
Company's principal amount of debt and accrued interest under the Company's past
due debt. In connection with the Debt Restructuring Plan, the Company recorded
a pre-tax gain of approximately $7.0 million as a result of the sale of shares
of Actel's Series A Convertible Preferred Stock for cash and cancellation of
debt as discussed below.
The Debt Restructuring Plan consisted of (i) a private offering (the "Actel
Share Offering") by the Company of shares of Series A Convertible Preferred
Stock (the "Actel Shares") of Actel for cash, and (ii) a private offering (the
"Unit Offering") by the Company to certain holders of outstanding indebtedness
of the Company of units consisting of Actel Shares and convertible notes of the
Company (the "Convertible Notes").
During the second quarter of 2000, the Company sold 1,149,614 Actel Shares for
gross proceeds of $4.9 million in the Actel Share Offering, resulting in a gain
of approximately $3.7 million. Proceeds were partially used to (i) reduce a
total of $2.2 million of the amounts owed to MCCIC under the Company's bridge
loan originally obtained from New Valley and the Company's Revolving Promissory
Note from MCCIC, (ii) reduce $1.0 million of past due notes and lease payables
to Berthel, (iii) pay placement fees and other offering expenses of $444,000,
and (iv) pay $479,000 to certain note holders upon conversion in the Unit
Offering in partial payment of amounts owed to such note holders. The remaining
proceeds were used for general working capital.
F-20
During the second quarter of 2000, the Company transferred 1,063,584 Actel
Shares and issued Convertible Notes in an aggregate principal amount of $4.6
million in the Unit Offering in exchange for the cancellation of outstanding
indebtedness in the amount of $9.2 million, resulting in a gain of approximately
$3.3 million. The Convertible Notes accrue interest at the rate of 12%
annually, with principal and accrued interest due on May 29, 2003, and are
convertible into shares of the Company's no par value common stock at a
conversion price of $3.03 per share (330 shares for each $1,000 due under the
Convertible Notes). The Convertible Notes are uncollateralized obligations of
the Company.
7. COMMON STOCK WARRANTS
A summary of common stock warrant activity during the years ended December 31,
2002, 2001 and 2000 is as follows:
WEIGHTED
AVERAGE
WARRANT WARRANT
WARRANT PRICE PRICE EXPIRATION
SHARES PER SHARE PER SHARE DATE
Balance at January 1, 2000. . . . . . 5,866,591 $1.12-9.75 $ 3.05 2002-2009
Warrants issued with termination of
employment agreements. . . . . . . . 150,000 1.00 1.00 2003
Warrants issued with notes payable to
MCCIC (Note 5) . . . . . . . . . . . 5,199,121 0.94-2.44 1.99 2004-2005
Warrants exercised . . . . . . . . . . (25,000) 1.75 1.75
Warrants cancelled . . . . . . . . . . (495,000) 3.50-4.13 3.88
-----------
Balance at December 31, 2000 . . . . . 10,695,712 1.12-9.75 2.44 2002-2009
Warrants issued in connection with
MCCIC advances (Note 5). . . . . . . 179,600 0.05-0.38 0.13 2006
-----------
Balance at December 31, 2001 . . . . . 10,875,312 0.05-9.75 2.40 2002-2009
Warrants issued in connection with
MCCIC advances (Note 5). . . . . . . 14,166 0.08-0.17 0.14 2007
-----------
Balance at December 31, 2002 . . . . . 10,889,478 0.05-9.75 2.40 2003-2009
===========
The weighted average remaining life of the warrants was 1.9, 2.3 and 3.1 years
at December 31, 2002, 2001 and 2000, respectively.
F-21
Warrants outstanding and exercisable at December 31, 2002 were as follows:
EXERCISE PRICE WARRANTS
$0.05-$0.38 193,766
0.94. . . . 435,467
1.00. . . . 150,000
1.12. . . . 229,279
1.25. . . . 200,000
1.31. . . . 884,804
1.44. . . . 21,000
1.50. . . . 100,000
1.75. . . . 1,918,228
2.09. . . . 499,600
2.19. . . . 40,000
2.25. . . . 831,467
2.44. . . . 2,207,783
2.50-3.00 . 90,000
3.01-3.25 . 1,798,084
3.26-3.60 . 1,210,000
9.75. . . . 80,000
----------
10,889,478
===========
On March 22, 2001, the Company extended the expiration date of 1,939,228
warrants from March 31, 2001 to March 31, 2002. On March 21, 2002 these
warrants were extended to March 31, 2003. Subsequently, on March 5, 2003 these
warrants were extended to March 31, 2004.
8. STOCK OPTION PLANS
The Company adopted the 1993 Stock Option Plan (the "1993 Plan") whereby options
may be granted to employees to purchase up to an aggregate of 272,529 shares of
the Company's common stock. The 1993 Plan is administered by the Board of
Directors, which determines to whom options will be granted. The 1993 Plan
provides for the grant of incentive stock options (as defined in Section 422 of
the Internal Revenue Code) to employees of the Company. The exercise price of
stock options granted under the 1993 Plan is established by the Compensation
Committee or the Board of Directors, but the exercise price may not be less than
the fair market value of the common stock on the date of grant of each option.
Each option shall be for a term not to exceed ten years after the date of grant,
and a participant's right to exercise an option vests at the rate of twenty
percent on the date of grant and each anniversary date until the option is fully
vested.
F-22
A summary of stock option activity under the 1993 Plan during the years ended
December 31, 2002, 2001 and 2000, is summarized as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 2000 221,101 $1.88-2.25 $ 2.06 182,564 $ 2.02
Cancelled. . . . . . . . . (20,299) 1.88
Cancelled. . . . . . . . . (15,523) 1.88
Cancelled. . . . . . . . . (5,000) 2.25
Cancelled. . . . . . . . . (8,836) 2.00
------------
Balance at December 31, 2000 171,443 1.88-2.25 2.09 171,443 2.09
Cancelled. . . . . . . . . (67,899) 1.88
Cancelled. . . . . . . . . (8,836) 2.00
Cancelled. . . . . . . . . (94,708) 2.25
------------
Balance at December 31, 2001
and 2002 . . . . . . . . . - - - - -
============
At December 31, 2002, 253,029 shares were available for future grants. The
Company has reserved 253,029 shares of common stock in connection with the 1993
Plan.
The Company has adopted the 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the 1997 Stock Option Plan to increase
the number of shares authorized to 1,727,471. The 1997 Stock Option Plan is
also administered by the Compensation Committee or the Board of Directors which
determines to whom the options will be granted. The 1997 Stock Option Plan
provides for the grant of incentive stock options (as defined in Section 422 of
the Internal Revenue Code) or nonqualified stock options to executives or other
key employees of the Company. The exercise price of the stock options granted
under the 1997 Stock Option Plan is established by the Compensation Committee or
the Board of Directors, but the exercise price may not be less than the fair
market value of the common stock on the date of the grant of each option for
incentive stock options. Each option shall be for a term not to exceed ten
years after the date of grant for non-employee directors and five years for
certain shareholders. Options cannot be exercised until the vesting period, if
any, specified by the Compensation Committee or the Board of Directors has
expired.
F-23
A summary of stock option activity under the 1997 Stock Option Plan for the
years ended December 31, 2002, 2001 and 2000, is as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 2000 1,289,957 $2.00-4.16 $ 2.64 1,106,259 $ 2.63
Cancelled. . . . . . . . . (323,236) 2.25-2.75
Cancelled. . . . . . . . . (600,000) 2.25-3.50
Cancelled. . . . . . . . . (1,164) 2.00
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (10,000) 3.13
Cancelled. . . . . . . . . (2,000) 3.88
Cancelled. . . . . . . . . (5,500) 2.56
Cancelled. . . . . . . . . (4,500) 2.75
Granted at market. . . . . 20,000 2.25
------------
Balance at December 31, 2000 333,557 2.00-2.81 2.58 323,557 2.58
Cancelled. . . . . . . . . (1,164) 2.00
Cancelled. . . . . . . . . (102,393) 2.25
Cancelled. . . . . . . . . (135,000) 2.75
------------
Balance at December 31, 2001 95,000 2.25-2.81 2.69 95,000 2.69
Cancelled. . . . . . . . . (75,000) 2.81
------------
Balance at December 31, 2002 20,000 2.25 2.25 20,000 2.25
============
At December 31, 2002, 1,707,471 shares were available for future grants and the
remaining life of the options outstanding was eight years. The Company has
reserved 1,727,471 shares of common stock in connection with the 1997 Stock
Option Plan.
9. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following for the
years ended December 31, 2002, 2001 and 2000 (dollars in thousands):
2002 2001 2000
Continuing operations -
Current, state $ - $ - $ (9)
======== ======== ===========
F-24
The provision for (benefit from) income taxes from continuing operations for the
years ended December 31, 2002, 2001 and 2000 is less than the amounts computed
by applying the statutory federal income tax rate of 35% to the income (loss)
before income taxes from continuing operations due to the following items
(dollars in thousands):
2002 2001 2000
Computed expected amount. . . . . . . . . . . . $(1,029) $(1,062) $ 50
Amortization and write-down of goodwill . . . . - - 1,313
State income taxes, net of federal tax benefit. - - (9)
Change in valuation allowance . . . . . . . . . 1,029 1,062 (1,363)
-------- -------- --------
Income tax provision (benefit). . . . . . . . $ - $ - $ (9)
======== ======== ========
At December 31, 2002 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $40 million to use to offset future
taxable income. These net operating losses will expire between 2008 and 2022.
Certain restrictions under the Tax Reform Act of 1986, caused by a change in
ownership resulting from sales of common stock, limit the annual utilization of
net operating loss carryforwards. The initial public offering of the Company's
common stock during 1996 resulted in such a change in ownership. The Company
estimates that the post-change taxable income that may be offset with the
pre-change net operating loss carryforward of approximately $4.5 million will be
limited annually to approximately $600,000.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 2001
Deferred tax assets:
Current:
Allowance for doubtful accounts receivable $ 63 $ 62
--------- ---------
Noncurrent:
Interest and other accruals. . . . . . . . 1,033 1,521
Carryforward of net operating loss . . . . 13,862 13,224
--------- ---------
14,895 14,745
--------- ---------
Total deferred tax assets. . . . . . . . . . . 14,958 14,807
Valuation allowance for deferred tax assets. . (14,958) (14,807)
--------- ---------
Net deferred tax assets. . . . . . . . . . . . $ - $ -
========= =========
A valuation allowance for the entire balance of deferred tax assets has been
recorded because management believes it is more likely than not that such assets
will not be realized due to the Company's history of operating losses.
F-25
10. COMMITMENTS AND CONTINGENCIES
At December 31, 2002 the Company's only operating lease is a month to month
lease of office space with a related party in the amount of $500 per month.
Rent expense under operating leases for the years ended December 31, 2002, 2001
and 2000 was $6,000, $20,000 and $95,000, respectively.
The Company guaranteed a facility lease between Actel and a third party. The
lease expires in June 2009 and total remaining noncancellable lease payments
were $765,000 at December 31, 2000. Actel was current on its lease payments as
of December 31, 2000. However, on April 11, 2001 Actel filed for Chapter 11
bankruptcy protection which was subsequently converted to Chapter 7. The
Company has not received any notification from the bankruptcy trustee or the
third party regarding the guarantee during 2001 or 2002. No loss, if any, has
been recorded in the consolidated financial statements with respect to this
matter.
The Company was notified by the FDIC of discrepancies between the amount of the
Company's notes payable pledged as collateral by a note holder and the amount of
notes payable recorded by the Company. The FDIC notified the Company on May 10,
2000, that the discrepancies total $770,000. Also, in July 2001, the Company
was notified that Peoples Bank had obtained a judgment against a Company
director and shareholder in the amount of $350,000, and that the collateral was
a Company promissory note in the principal amount of $350,000. Another party
has asserted that he is entitled to $500,000 allegedly outstanding under a note
payable. Management believes that no funds were received by the Company with
respect to these notes and that it has other defenses. No assurance can be
given that the Company's defenses are valid or that the Company will not be
liable for any part or all of the amounts allegedly due under these notes. No
loss, if any, has been recorded in the consolidated financial statements with
respect to these matters.
On November 23, 2001 three individuals, one of which was a former officer and
director of the Company, filed suit against the Company, several former officers
and directors of the Company and several related parties. These lawsuits allege
that the named individuals and entities devised a scheme to defraud the three
plaintiffs to personally borrow funds from a financial institution, invest the
proceeds in the Company as a note payable with the promise of stock options and
repayment of the notes, and give the financial institution a security interest
in the notes under the Uniform Commercial Code. Unspecified damages sought by
the plaintiffs include actual, punitive, and treble damages and court costs and
attorney costs. The Company's Director and Officer ("D&O") insurance carrier has
notified the Company that because one of the plaintiffs was a former director of
the Company, that the D&O policy will not provide coverage for the claims by
that plaintiff. The Company believes that its D&O policy will provide coverage,
up to the policy limit, in this lawsuit related to the other two plaintiffs. In
November 2002, the Company entered into a settlement agreement providing for the
issuance by the Company of 517,000 shares of the Company's common stock to the
three plaintiffs and one other individual who did not file suit. The
effectiveness of the settlement is contingent on the closing of the proposed
merger with Polar. No loss, if any, has been recorded in the consolidated
financial statements with respect to these matters.
As of December 31, 2002 the Company had been notified by several state taxing
authorities that approximately $46,000 of past due taxes and penalties is
allegedly owed. Some of the states have assigned the alleged amounts due to
collection agencies or filed tax warrants. Management believes that it has
meritorious defenses against these amounts. No assurance can be given that the
Company's defenses are valid or that the Company will not be liable for any part
of these amounts. No loss, if any, has been recorded in the consolidated
financial statements with respect to these matters.
As of December 31, 2002 the Company had been notified by several vendors that
approximately $45,600 is owed. Management believes that it has meritorious
defenses against these amounts. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
F-26
The Company has divested certain of its businesses during 2001 and 2000. As a
result of such divestitures, there may be lawsuits, claims or proceedings
instituted or asserted against the Company related to the period that the
businesses were owned by the Company. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
On November 16, 1998 the Company entered into an Employment Agreement with Paul
C. Tunink, Chief Financial Officer. The Employment Agreement had a term through
November 30, 1999 and renewed automatically from year to year thereafter, unless
terminated by either party, and provided for a base salary of not less than
$128,000. The Employment Agreement contained a provision restricting
competition with the Company for a period of one year following termination of
employment. Mr. Tunink's Employment Agreement provided that if his employment
was terminated by the Company for any reason other than cause, Mr. Tunink would
be entitled to receive severance at an annual rate of $128,000 for one year and
continuation of health insurance coverage for one year. During the fourth
quarter of 2001, Mr. Tunink's employment was terminated in an effort to control
costs. As of December 31, 2001, the Company recorded a payable of approximately
$146,000 related to this severance agreement.
11. RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with Berthel and other
affiliated entities. Berthel provided lease and other financing services,
including investment banking, to the Company. Other affiliated entities
provided financing, consulting and miscellaneous services to the Company. See
Note 5 for the disclosure of the various related party financing agreements.
In December 1999, Berthel entered into a Standstill Agreement with the Company.
Under the Standstill Agreement, Berthel indicated its intention to form a
creditors committee to represent the interests of Berthel and other creditors of
the Company. The Company agreed to provide the creditors committee with access
to information regarding the Company and its business and to advise the
creditors committee in advance regarding certain significant corporate
developments. The creditors committee may also demand that the Company take
certain actions with respect to the Company's assets and business. The
creditors committee agreed to forbear from taking actions to collect past due
debt owed by the Company in the absence of the unanimous approval of the
creditors committee. As of December 31, 2002, the Company and Berthel are the
only parties to the Standstill Agreement and Berthel is the only member of the
creditors committee.
In January 2000, the Company retained Berthel to assist the Company regarding
the identification and investigation of strategic alternatives that might be
available to the Company. Various fees were paid to Berthel under the Placement
Agreement including a monthly retainer and placement fees. The Company paid
Berthel total fees of $536,000 during 2000. This agreement was revised on July
1, 2001 for a period of 12 months with annual renewal options. The agreement
allows for a monthly retainer fee of $20,000 and other success fees defined in
the agreement based on the strategic event that occurs. The expenses related to
the previous agreement and the revised agreement for 2002 and 2001 were $248,131
and $218,980, respectively. As of December 31, 2002 the Company owes Berthel
$442,111 under both agreements.
The Company has subleased office space from Berthel Fisher & Company Management
Corp., an affiliate of Berthel, since October 2001 on a month-to-month basis.
The expense related to this sublease agreement for 2002 and 2001 was $6,000 and
$1,500, respectively. The Company owes Berthel Fisher & Company Management Corp.
approximately $7,500 in rental payments as of December 31, 2002.
F-27
On July 1, 1994, the Company entered into an agreement with a minority
shareholder to provide telecommunication services to hotels owned and managed by
Larken, Inc., a company 50% owned by the minority shareholder. Revenues of $0,
$0 and $109,000 were generated from such agreement for the years ended December
31, 2002, 2001 and 2000, respectively. The agreement provided for a fixed
payment of $30,000 per month in commissions to be paid to the minority
shareholder. This agreement was terminated in June 2000.
In January 2000, the Company entered into a letter agreement with Pirinate
Consulting Group, LLC ("Pirinate"), an entity controlled by Eugene I. Davis, for
the personal services of Mr. Davis as the Company's Interim Chairman of the
Board and Interim Chief Executive Officer. Pirinate received $15,000 a month
plus out-of-pocket expenses for these services. In May 2000 Mr. Davis became
the Chairman of the Board and Chief Executive Officer of the Company. Mr. Davis
resigned on October 9, 2001 as Chief Executive Officer and remained on the Board
of Directors.
The Company entered into an agreement dated August 1, 2002, as amended, with
Pirinate, whereby Pirinate agreed to provide the services of Eugene I. Davis to
serve as Chairman of the Board and Chief Executive Officer effective August 1,
2002. Under the agreement, the Company issued 40,000 shares of the Company's
common stock to Pirinate in satisfaction of unpaid fees for Mr. Davis' past
services and the Company agreed to pay Pirinate $3,000 per month during the term
of Mr. Davis' services. The Company also agreed to contingent compensation of
4,000 shares of the Company's common stock per month, contingent upon the
closing of the proposed merger with Polar.
On December 24, 2000, the Company signed a consulting services letter agreement
with Prentice Services LTD ("Prentice"), an entity controlled by Wayne Wright, a
member of the Company's Board of Directors and a significant shareholder. The
agreement provided that Mr. Wright would serve as President of PIC and would
provide consulting services to PIC, as directed by the Company's Chief Executive
Officer. Prentice received $15,000 a month, plus out-of-pocket expenses, for
these services. Also, at the sole discretion of the Company's Board of
Directors, Prentice would receive additional success fees and bonuses. The
Company paid $105,000 and $15,000 under this agreement in 2001 and 2000,
respectively.
During 2002, Mr. Wright served as the Company's Interim Principal Accounting
Officer and received compensation of $4,000 per month.
A summary of transactions with related parties for the years ended December 31,
2002, 2001 and 2000 is as follows (dollars in thousands):
2002 2001 2000
Consulting expense - Prentice (included in discontinued
operations). . . . . . . . . . . . . . . . . . . . . . $ - $ 105 $ 15
Consulting expense - director. . . . . . . . . . . . . . 48 - -
Consulting expense - Pirinate. . . . . . . . . . . . . . 15 121 181
Interest expense on related party notes payable. . . . . 542 539 1,620
Interest expense on notes payable to Berthel . . . . . . 375 372 243
Interest expense on notes payable to MCCIC . . . . . . . 69 68 36
Interest expense on notes payable to Polar . . . . . . . 20 - -
Commissions to minority shareholder. . . . . . . . . . . - - 180
Investment banking and placement fees to Berthel . . . . 248 219 536
Lease payments to Berthel. . . . . . . . . . . . . . . . - - 840
Rent expense on lease with Berthel . . . . . . . . . . . 6 2 -
Certain parties were considered related parties in 2000 but not in 2001 or
2002 due to the disposition of assets.
F-28
12. PROFIT SHARING PLAN
The Company had a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Employees were eligible to participate in the plan after
completing three months of service. There were no contributions required and no
discretionary contributions made to the plan for the year ended December 31,
2000.
Effective November 15, 2000, the Company terminated the plan due to low
participation and high administrative expenses.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by the
Company utilizing valuation methods appropriate in the circumstances. The
carrying amount for financial instruments included among cash, receivables,
notes payable, and other short-term payables approximates their fair value
because of the short maturity of those instruments. The estimated fair value of
other significant financial instruments are based principally on discounted
future cash flows at rates commensurate with the credit and interest rate risk
involved and the timing of when the instruments were entered into.
The estimated fair values of the Company's other significant financial
instruments at December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 2001
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Long-term debt $ - $ - $4,632 $ -
14. SUBSEQUENT EVENT
During the period from January 1, 2003 through March 7, 2003, the Company
borrowed $44,753 from Polar. The notes are payable on January 16, 2004 and
February 4, 2004 and bear interest at 10%.
F-29
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001 (dollars in thousands except per share data).
These quarterly results have been reclassified from those previously reported in
form 10-Q's filed with the Securities and Exchange Commission to reflect the
results of operations for PIC, that was sold effective July 31, 2001, as
discontinued operations for all periods presented.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2002
- ----
Revenues . . . . . . . . . . . . . . . . . $ - $ - $ - $ - $ -
Gross profit . . . . . . . . . . . . . . . - - - - -
Loss from continuing operations . . . . . (696) (733) (763) (749) (2,941)
Net loss . . . . . . . . . . . . . . . . . (696) (733) (763) (749) (2,941)
Basic and diluted net loss per common share $(0.06) $(0.06) $(0.06) $(0.06) $ (0.24)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2001
- ----
Revenues. . . . . . . . . . . . . . . . . . . . . . . $ 21 $ 1 $ - $ - $ 22
Gross profit. . . . . . . . . . . . . . . . . . . . . 21 1 - - 22
Loss from continuing operations . . . . . . . . . . . (733) (776) (546) (978) (3,033)
Net income (loss) . . . . . . . . . . . . . . . . . . (832) (858) 854 (978) (1,814)
Basic and diluted net income (loss) per common share. $ (0.07) $ (0.07) 0.07 $ (0.07) $ (0.15)
The third quarter of 2001 includes a $1,314,000 gain on the sale of PIC in net
income. The fourth quarter of 2001 includes a $146,000 severance accrual in loss
from continuing operations (see Note 10).
Per share information is calculated for each quarterly and annual period using
average outstanding shares for the period. Therefore, the sum of the quarterly
per share amounts will not necessarily equal the annual per share amounts
presented.
16. SUBSEQUENT EVENT (UNAUDITED)
On March 31, 2003, a settlement agreement that the Company had entered into with
a financial institution in which the financial institution agreed to accept
payment of $100,000 in cash and 475,000 shares of the Company's common stock in
full satisfaction of all principal and interest due of approximately $964,000 as
of December 31, 2002, expired.
* * * * *
F-30
MURDOCK COMMUNICATIONS CORPORATION
SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------
NET
BALANCE CHARGES BALANCE
AT TO AT
BEGINNING COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
Year ended December 31, 2002
Allowance for doubtful accounts $ 179 $ - $ - $ 179
Year ended December 31, 2001
Allowance for doubtful accounts 225 (46) - 179
Year ended December 31, 2000
Allowance for doubtful accounts 152 98 25 225
F-31